Investing Lesson 11: The Road to Riches Isn't Paved with Dividends
Larry Swedroe, Director of Research, The BAM Alliance, 1/29/19.
Lesson 11: The road to riches isn’t paved with dividends.
Despite the fact that traditional financial theory has long held that dividend policy should be irrelevant to stock returns, over the last 10 years, we’ve seen a dramatic increase in investors’ interest in dividend-paying stocks. This heightened attention has been fueled both by hype in the media and the current regime of interest rates, which are still well below historical averages.
The low yields available on safe bonds have led even once-conservative investors to shift their allocations from such fixed-income investments into dividend-paying stocks. This is especially true for those who take an income, or cash flow, approach to investing (as opposed to a total return approach, which I believe is the right one).
How did that strategy work in 2018? According to data from S&P Dow Jones Indices, the 415 dividend-paying stocks within the S&P 500 Index (equal-weighting them) lost 8.1%, underperforming the 92 non-dividend payers, which returned -2.4%, an outperformance of 5.7 percentage points.
In addition, Vanguard’s High-Dividend ETF (VYM) lost 5.9%. It has also underperformed the S&P 500 in six of the last seven years (the exception was 2016). And over the last 10 years, VYM returned 12.2% per year, underperforming VFIAX (Vanguard 500 Index Fund) which returned 13.1%.
- Investing Lesson 1: Active management is a loser’s game
- Investing Lesson 2: Diversification is always working; sometimes you like the results and sometimes you don’t
- Investing Lesson 3: The mistake of recency
- Investing Lesson 4: Your Discipline Will Be Tested
- Investing Lesson 5: The Stock Market and the Economy are Different
- Investing Lesson 6: Crystal Balls are Cloudy
- Investing Lesson 7: “Sell in May and go away” is the financial equivalent of astrology
The BAM Alliance is an active community of more than 140 independent firms dedicated to delivering true wealth management. As Vermont's only member of the BAM Alliance, Copper Leaf Financial is very pleased to have access to all of the organization's resources and industry thought leaders including Larry Swedroe. Larry is the well-respected author of 16 books on personal finance, and has at times shared his insights directly with Copper Leaf clients.