Thursday 7 July 2011

More Evidence for Income Investing

This blog obviously has a pretty big bias towards income investing. Am I playing my cards right? Or building a house of cards?

In previous posts I have provided some supporting evidence, particularly in relation to investing in high dividend shares.

Here's some more...

Maynard Paton, in a recent Motley Fool article has looked at the total returns of the FTSE 350, comparing 'high yield' and 'low yield' indices. Over the past 5 years, the 'high yield' shares have underperformed - probably due primarily to the banking crisis. However, over the last 25 years, the 'high yield' index has outperformed the 'low yield' index in 15 years. What's more, the High Yield Index has delivered greater consistency for buy-and-hold investors.

Further evidence for income investing - this time from a US perspective - was also included in a  recent article on Seeking Alpha.  It notes that "there’s little doubt that over the long run (but not every short sprint) dividend stocks, especially those with growing dividends, outperform the market and outperform non-dividend payers:
  • A Ned Davis Research study, from 1972 through early 2010, shows stocks of companies with at least five years of dividend growth, and those initiating dividends, popped total returns averaging over 9% yearly. Those maintaining steady dividends averaged over 7%. During the same period, non-dividend payers pulled in less than 2% a year.
  • In another long-term study, using a different group of stocks, time period and return metric, AllianceBernstein researched the largest 1500 stocks by market capitalization from 1964 to 1999. Over those 35 years, AB found that in the year following a dividend increase, dividend raisers’ total returns averaged a healthy 1.8 percentage points more than stocks that did not raise dividends.

Investment firm Credit Suisse conducted "often cited yet widely misunderstood" research (pdf) on this, concluding:
“Stocks with high yields generally outperformed those with low yields … the maximum performance was delivered by companies with high dividend yields and low payout ratios.”

In their updated 2001 through 2010 study, Credit Suisse designated as “high yield” anything above 2.7%. Even smaller “high yields” qualified in their original 1990 through 2006 research. And their winning “high-yield, low payout” group topped out at a 5.8% yield. Achieving any higher yield required at least a “medium” payout ratio. (“Low” yields ranged from .1% to 1.3%, with “medium” yields filling the donut hole.)"

The best performers comprised stocks yielding 2.7% to 5.8% with payout ratios of 56% or less.

Investment firm Miller-Howard studied an overlapping time period, 1993 to 2007, and showed similar results, finding that stocks with 3% to 6% yields beat both higher and lower yielders, and with less volatility. Over this generally-good period for stocks, these top performers averaged an annual total return near 13%, compared with 11% for stocks with 6%+ yields. Interestingly, stocks yielding below 3% nudged past the high-yielders as well, averaging nearly 12% annually.

Tweedy Brown investment group's synthesis of several studies (pdf) show that higher-yielding groups often outperform when stocks are ranked by yield. But, as in the Credit Suisse research, it is not always clear what 'high yield' means in some of these summaries.

Finally, EdwardJames stockbrokers (pdf) suggest not chasing the highest yields.

The Seeking Alpha article concludes: "Those who want high current income from their stocks will no doubt stick with high yields. But adding some high yielders with small but steady dividend growth will help offset inflation while likely pointing the investor toward higher quality companies."

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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