Dividend paying stocks outperform with lower volatility. Put another way... non-dividend paying so-called growth stocks are inferior investments. Now that might come as a surprise to many of you who've been suckered into buying growth stocks by your fee-based (stockbroker) advisors (either directly or via growth mutual funds), but the empirical evidence is irrefutable. You are better off buying "stodgy" dividend paying stocks because you will make more MONEY with less RISK.
The latest in a string of studies done by the academic world has once again verified that dividend-paying stocks are better investments than the zero dividend crew. Specifically, a study done by Dr. C. Thomas Howard (Reiman School of Finance) for the period January 1973-September 2010, shows that companies which grew their dividend out performed dividend cutting stocks by more than 10% annually. Companies that merely maintained their dividend outperformed companies with no dividend by 5.29% annually. Let's do some Q&A...
Would you rather have $24,267 or $9,285? Would you rather have $21,288 or $11,977? The first number is what you'd accumulate from 1973 thru September of 2010 if you stuck to dividend growing stocks and made an initial $10,000 investment. The second number represents dividend cutting stocks while the third amount is a portfolio of no change dividend paying stocks and the final number are the GROWTH companies that pay no dividend. Kinda makes you wonder why the brokers are always pushing growth stock mutual funds on you doesn't it?
But it gets even better! You can have the $24,285 portfolio with less risk - as measured by volatility. Dividend growing stocks had a standard deviation of 17.6% versus a standard deviation of 26.6% for zero dividend paying stocks. Standard deviation is a measure of volatility which means lower is better.
Now some of you might point out that there is a tax penalty associated with dividends in non-qualified accounts (qualified accounts such as IRAs, 401(k)s and 403(b)s don't pay taxes and aren't impacted). And you'd be right. However, the out performance of dividend paying stocks more than compensates you for holding them - EVEN IN A TAXABLE
ACCOUNT.
The bottomline (once again) is that investors are far better off buying dividend paying stocks (directly if possible to cut out the mutual fund fees) rather than the high-flying, zero dividend paying growth stocks that are typically pushed by the commissioned based salesmen passing themselves off as investment advisors.
Biechele Royce Advisors buys good companies at great prices. We are currently focusing even more than normal on high-quality dividend paying stocks in our equity portfolios. Fair value for the S&P 500 is between 800-900 and we expect the market to exhibit increased volatility over the next few years as the current cyclical bull market ends and the secular bear market resumes.
