Wednesday 30 October 2013

My Preciousss....The Attractiveness of Dividend Stocks

The DIY Income Investor portfolio includes dividend shares - specifically those with a high-yield - because I expect these to perform better over time, as an asset class, than other share types.

There is quite a lot of academic research supporting this belief - and Allianz Global Investors has provided some further more recent positive evidence supporting the attractiveness of dividend shares.

The paper is entitled 'Dividend stocks – an attractive addition to a portfolio' and it provides some new analysis of the recent behaviour of dividend shares in Europe, Asia-Pacific and the US.

The 'decisive insights' of the paper are  described as:
  • Real European and US bond yields are currently negative, making dividend stocks an attractive addition to fixed-income investments.
  • European and Asian-Pacific (excluding Japanese) companies are particularly generous and pay out much of their profits to investors whereas US companies tend to prefer share buybacks, which are a more flexible payout vehicle.
  • Dividends contributed about 44 % to the overall, annualised returns of equity investments in the MSCI Europe between 1970 and end-August 2011. (Source: Datastream)
  • Dividend payouts tend to be steadier than corporate profits.
  • Dividend stocks also have tended to be subject to smaller price fluctuations than the overall market.
  • Stocks with high dividend returns usually showed a better risk-return profile than the overall market in the past.

The paper does contain some warnings - particularly that past performance is not always a reliable guide to the future. There are also risks:

"The search for dividend earnings carries risks, however, and should not be observed in an entirely uncritical manner. When buying shares, dividend earnings can sometimes give the wrong signals. It is assumed that the current payments will remain stable in future, but that is not always the case. For example, until the middle of 2007 financial stocks were paying glittering dividends. But the onset of the financial crisis brought huge falls in share prices - and company profits and dividend payments crashed with them."

Finally, there is reference to the role of yield in identifying out-of-favour shares:

"Ultimately, high dividend yields suggest that market participants are already pessimistic about future corporate profit developments and that most of the risks have been priced in. As soon as there are more signs of a pick-up in risk appetite and an economic stabilisation investors might benefit from investments in high-dividend stocks."

So, many of my investing biases are reinforced. And, reassuringly, in Europe we appear to have one of the best market environments for successful dividend investing.

Cue Gollom...

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.


  1. Hi DIY,

    I've recently began to purchase USA shares for extra diversification. Some 5% + yielders like REITs, Utilities. Some of the behemoths like Coke, Pepsi, Proctor, Johnson, Exon, McDonalds, Wal Mart etc have typical dividends of 3-4% but typically 7-10% dividend growth rates. Will purchase these after a correction. Obviously there is a currency risk here, but that's part of the diversification. I target USA dividend Aristocrats, these are companies that have grown dividends for 25 years or more or dividend champions (grown dividends for more than 10 years). Website Seeking Alpha has really good article on choosing a USA dividend share portfolio of 20-25 shares.

    We should differentiate between a high yield dividend stock and a Dividend Growth Stock. A balanced portfolio should contain both.

    1. Interesting - but presumably you have a bit of admin to do to recover US-deducted tax? I prefer to use ETFs for non-UK-quoted securities, as they deal with this issue. As for dividend growth - I use yield as an indicator of out-of-favourness and most time capture some quick worthwhile capital gains. You somethimes have to wait a long time to get a similar return with a dividend gtowth stock.

  2. Hi DIY,
    My broker (Charles Schwab) deals with the US tax, you just complete a very basic form once a year and they then tax you on dividends at 15%, that's it. I have been very impressed by Schwab.

    In the USA there seems to be many companies that have 25 year + of dividend increases. My strategy is to generate income from these shares in the medium to long term because the yield is low but dividend growth is significant. For eg McDonalds has entry yield of 3.4% and 5 year compounded dividend growth of 15%. Therefore the yield will double every 5 years or so, even quicker with re-invested dividends (of course past history is no guarantee). If you want income now, use UK high yielders and use USA dividend growth shares in the future - that's my plan anyway.

    Current exchange rate of £1 = $1.6 is not too bad.

    Below is the link to Seeking alpha article. Two blogs I highly recommend for USA stocks is Dividend Growth Investor and Dividend Mantra.