In continuing to build a solid strategy for finding investment ideas, one must also consider dividends. Dividends are one of two reasons for owning stocks in the first place. As the saying goes, eventually, one will want to be paid for being part owner of the company.
Therefore, we are back looking at the effect of dividends on stock performance. Again, we limit our look to stocks that were priced at $5 or above, and they must have paid a dividend in the previous 12 months. We hold the stocks for 12 months and then, reassess. We then compare the dividend group’s performance to the group of stocks that did not pay a dividend during the previous 12 months. All data is from Value Line from 1986 to present.
Dividend paying stocks average an annual return of 11.8% (sig = 19.7%). Now compare this to non-dividend paying stocks. Non-dividend paying stocks yielded an average return of 9.4% (sig = 21.0%). What does this mean? It means that dividend-paying stocks have a better yield with lower volatility. The difference is significant. The individual is a winner by having better returns and smaller swings in portfolio performance. For a $10,000 investment, that can make a $6,009 difference over a ten-year period.
There will be more to come, as we build a basic strategy for the individual investor. If one builds a screen that looks for stocks that 1) have earnings and 2) pay a dividend, they will have a strategy that will have strategy that averages 11.9% (sig = 19.7%).