When it comes to investing in dividend-paying stocks, High Yield and Dividend Growth have emerged as the two main strategies employed by fund managers. Income investors who are looking to rationalize these strategies are exploring how dividend-paying stocks have performed throughout the decades. In particular, they are interested in learning whether consistent dividend growers have outperformed the market.
As it turns out, there’s a very good reason why Dividend Growth has guided income portfolios for so long. Historically, dividend-growing stocks have performed better than companies that cut their dividends or did not pay them at all. Dividend growers have not only enjoyed higher total returns, but have done so with lower risks.
What’s more, companies that have steadily increased their payouts have provided excess returns during periods of market volatility. Whether cyclical downturns or full-blown recessions, dividend payers have routinely outperformed their non-yielding assets. Using the CBOE VIX Volatility Index, the following chart illustrates how companies with persistent dividend growth have provided excess returns during periods of increased volatility.
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Dividends and Market Volatility
| VIX Monthly Increase | Average Excess Return of Dividend Growers |
|---|---|
| > 40% | 1.60% |
| 20-40% | 0.40% |
| 10-20% | 1.20% |
| <10% | 0.20% |
| Average (Across All Months When VIX Increased) | 0.80% |
The average excess return of dividend growers is 0.8% across all months where the CBOE VIX increased. In fact, excess returns increased the most (1.6%) during months when the VIX spiked more than 40%.
The VIX indicator measures expected volatility in S&P 500 index options over the next 30 days. As such, the VIX normally moves in the opposite direction of the S&P 500 Index. The spike in volatility during the 2008 financial crisis, which saw the VIX approach the staggeringly high 90 level, was accompanied by a massive drop in equities.
Against this backdrop, it comes as no surprise that the number of dividend growers and initiators have increased after a recession. This is true of the past four decades stretching all the way back to 1972. The following chart demonstrates this point.
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Dividend Growers vs. Cutters
Companies with persistent dividend growth have also exhibited strong fundamentals when compared with companies that do not pay dividends. This is true of earnings, revenue, free cash flow (FCF), margins and return on equity (ROE). Historically, all these variables have been higher for the dividend growers. As we can see by the following chart, U.S. companies outside the farm and financial industries are currently sitting on a record pile of cash and liquid assets. At the same time, they are boosting dividends.
You can find an updated list of companies that recently announced changes in their payout policies, along with their ex-dividend dates, in our Dividend Payout Changes and Announcements tool.
Corporate Cash Levels and Dividend Payouts
Additionally, the valuations of dividend growers are generally very attractive. As seen below, dividend growers have traded at a 23% premium to high dividend yielders over the past three decades. However, they’ve traded at a discount since the start of 2017.
Find all the companies that have increased their dividends for more than 25 consecutive years, in our 25 year dividend increasing stocks page, and for more than 10 consecutive years, in our 10 year dividend increasing stocks page.
The Bottom Line
When it comes to income investing, it pays to go with Dividend Growth. This strategy has withstood the test of time by providing steady growth even during periods of volatility. By analyzing the trends throughout the decades, it’s clear that dividend growers provide superior valuations and returns, not to mention persistent payouts during the ups and downs of the market.
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