High-Dividend Stocks Have Value – and Beat Value, Too

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In reading Larry Swedroe’s article, Slaughtering the High-Dividend Sacred Cow, it strikes me that high-dividend stocks are far from “sacred cows” and need not be slaughtered. Instead, his value-advocacy piece ignores the enhanced risk-adjusted returns and the much lower drawdowns that can be found in a diversified basket of high-dividend stocks.

His main thesis is to narrowly compare the absolute performance of high-dividend-paying stocks to value stocks. This ignores academic and practitioner research documenting empirical results and theoretical insights that support sustainable high-dividend payers.

While often thought of as similar, value and dividend strategies are distinct. Value stocks are often good investments, but sometimes they are cheap for a reason and consistently exhibit higher volatility. Ignoring their superior risk-adjusted returns, and the empirical and theoretical backing for lower drawdowns, does high-dividend payers a disservice. In fact, my firm’s analysis shows that:

  • There is a significant high-dividend premium;
  • High-dividend stocks outperform traditional value stocks on a risk-adjusted basis;
  • High-dividend stocks have much lower drawdowns due to a perception of sound financial health, resulting in flight-to-safety characteristics compared to value stocks.

Screening out the highest – the most risky and unsustainable – dividend payers can lead to the best results, consistent with existing research (Patel et al., 2006). Research shows that high-dividend paying stocks’ management teams are more conservative, less driven to empire building, and tend to steer safely clear of negative surprises (Arnott and Asness, 2003).