At this crisis point in history - what could possibly create these rare and extraordinary gains?

An Arizona multi-millionaire's revolutionary initiative is 
helping average Americans  find quick and lasting stock market success.

Since the Coronavirus came into our lives this slice of the stock market has given ordinary people the chance to multiply their money by 96% in 21 days on JP Morgan.

Economy  | February 13, 2020

Many academics subscribe to the Dividend Irrelevance theorem that states that, in a world with no taxes or costs of financial distress, dividend policy is irrelevant. After all, an investor could simply sell a portion of their portfolio to create a liquidity stream and would not need to rely on dividends from their portfolio holdings. Given the double taxation of both corporate profits and shareholder dividends, some muse that dividends are inefficient altogether.

This article will demonstrate that the Dividend Aristocrats (NOBL), constituents of the S&P 500 (SPY) that have paid increasing dividends for more than 25 years, have generated higher total returns than the broader market. The graph below shows that the Dividend Aristocrats (white) have outperformed the broad index from which they are drawn, the S&P 500 (orange) by 1.98% per year over the past three decades.

Dividend Aristocrats vs. S&P 500 Returns

Dividend policy is far from irrelevant. If you simply divided the U.S. stock market into dividend-payers and non-dividend payers, you would see that dividend payers have produced higher returns (roughly 1.5% more per year) with roughly 60% of the volatility over the modern history of the U.S. stock market.

Cumulative Returns - Dividend Payers vs. Non-Dividend Payers

The conceptual framework that suggests that dividend policy is irrelevant ignores the behavior of company management. Poor managers can not only risk a company's ability to pay dividends but also expose a company to financial ruin. In "The Bright Side of Paying Dividends: Evidence From Stock Price Crash Risk," authored by Jeong-Bon Kim of University of Waterloo, Le Luo of Huazhong University of Science and Technology, and Hong Xie of the University of Kentucky, the authors demonstrated the negative correlation between dividend payments and stock price crashes. The paper suggested that a firm's commitment to dividend payments reduces agency costs and lowers the risk of large-scale stock price drops.

Dividend stocks outperform non-dividend paying stocks over time, but the highest yielding stocks can occasionally be value traps that fail to pay sustainable dividends to investors. Again, if you broke the same long-run dataset used in the first graph into deciles based on dividend yield, the highest dividend yielding cohort would produce inferior absolute and risk-adjusted returns to lower yielding cohorts.

Hopefully, Seeking Alpha readers understand the need to ignore the siren song of simply buying stocks based on yield alone. Historically, that strategy has also underperformed; buying stocks with sustainable dividend yields has generated better long-run performance with lower risk. What better way to demonstrate dividend sustainability than to pay increasing dividends for multiple business cycles? Investing in the Dividend Aristocrats is not a particularly high dividend strategy, but owning the underlying companies has delivered risk-adjusted outperformance over time. If you are interested in the total return of your money like I am, this has been an exceptional strategy over time.

In a period stretching back 30 years, the Dividend Aristocrats have produced market-beating performance with less variability than the broader index through a combination of Downside Protection and Upside Attainment.

Downside Protection

In a period stretching back 30 years, the Dividend Aristocrats have produced market-beating performance with less variability than the broader index through a combination of Downside Protection and Upside Attainment.

Notably, the Dividend Aristocrats outperformed the S&P 500 in every down year for the broad market in the sample period - including 2018 - gleaning part of the strategy's outperformance through lower drawdowns in weak market environments. Below is a table of full year returns for the S&P 500 Dividend Aristocrat Index and the S&P 500. Down years for the S&P 500 are bracketed.

Performance of S&P 500 vs. Dividend Aristocrats by Year

In the six down years for the S&P 500 since 1990, the S&P 500 average return was -15.5%, but the Dividend Aristocrats fell by an average of just 2.1%

Upside Attainment

Excluding those six pesky down years, the S&P 500 has risen in 24 of 30 years, producing a 17.4% average annual return in those years. In those same years, the Dividend Aristocrats have produced a 15.9% average return. That is a pretty good story, in down years for the broad market, you lose 2%, but in up years, you produce 16% total returns.

The business model of Dividend Aristocrats must be inherently stable and produce continual free cash flow through the business cycle, or these companies would not be able to maintain their record of paying increasing dividends for decades. While this means that these companies are prone to lower drawdowns, they can still generate strong total returns.


As the previous chart shows, the Dividend Aristocrats lagged in 2019 by 3.5%, their worst relative performance since 2007. Before that 2007 underperformance, the strategy had not lagged by so much since 1998 and 1999 during the escalation of the tech bubble. Before the tech bubble inflated, the worst relative year for the Dividend Aristocrats had been 1993, which preceded a flat year (1994) for the stock market characterized by sharply rising interest rates that hurt dividend stocks on a relative basis.

Market bulls have to hope that the underperformance of the Dividend Aristocrats in 2019 is more akin to 1995-1996 when a moderating Fed successfully extended the economic cycle with a reversal in the Fed hikes of 1994. Jerome Powell certainly hopes he successfully orchestrated a mid-cycle easing last year.

Market bears might point to the recent underperformance of the Dividend Aristocrats as relative froth in the broad market. I would lean towards mid-cycle underperformance given that the level of underperformance in 2019 was not as material as the underperformance that preceded previous corrections. The Dividend Aristocrats, like yesterday's article on Low Volatility stocks, will tend to outperform in the correction phase of the business cycle and keep pace in the upswing. This combination of downside protection and upside attainment has been a winning trade for dividend growth investors over time. Strategies that outperform the broad market are never irrelevant.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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