The Top Dividend Strategy: It's Simplicity That Reigns Supreme

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This is among the most effective investment strategies, yet you can readily outperform it.

Many investment funds and trillions of dollars from cautious investors have been allocated with the conviction that firms which progressively raise their dividend payouts over time tend to be the top performers in the stock market in the long term.

The dividend growth tail occasionally leads the dog: For instance, the roster of 69 S&P 500 Dividend Aristocrats comprises firms that have increased their dividends for a minimum of 25 consecutive years. If management decides not to boost these payments—even by a single cent—companies like Pfizer, General Electric, AT&T, and Walgreens risk losing this prestigious status and face consequences as a result. Similarly, ExxonMobil has experienced such repercussions when failing to uphold this tradition. tied itself in knots Five years ago, to maintain the difference, doing this by a whisker .

Over the years, dividends have lost some significance, yet they remain far from obsolete. According to Ed Clissold at Ned Davis Research, more than eighty percent of firms within the S&P 500 distribute dividends, with 324 either boosting their payouts or starting to issue them in the last twelve months.

Although unintentionally, several years back, some research from his company ignited an obsession with dividend-growing stocks. Employing an outdated method for computing returns that has since been frequently replicated, the study demonstrated impressive outcomes particularly for those kinds of equities.

The research organization has incorporated new methods to account for shifts within the sector, indicating that stocks with increasing dividends have performed admirably. However, an alternative approach—which entails higher fluctuation and trading activity—has proven even more lucrative: concentrating on high dividend yields. Since 1973, companies in the upper tier regarding yield have outperformed those known as dividend growth stocks during both market upturns and downturns.

Be cautious about concentrating solely on yield, however; a DIY approach. That functioned until it ceased to. The "Dogs of the Dow," which gained prominence through Michael O'Higgins' 1991 publication titled "Beating the Dow," suggested purchasing the ten stocks with the highest dividend yields from the 30-stock blue-chip index annually.

During a recent conversation, Bank of America analyst Savita Subramanian was queried by podcast host Meb Faber Whether she has any basic screeners that she suggests for selecting stocks.

She mentioned that the initial step involves categorizing big capitalized, dividend-yielding stocks into five groups based on their yield. However, purchasing from the highest yielding category isn't recommended as these might turn out to be duds—much like Walgreens before its meltdown Instead, purchase the second-most productive cluster of trees.

"So it's similar to the Steady Eddie approach that anyone can implement... you can obtain this information from the web at no cost. You could even execute it monthly on your own, and it has turned out to be quite an intriguing yet incredibly dull and unexciting method that appears effective across various market conditions," explained Subramanian.

How well? Using information from Hartford Funds A $1,000 investment in the S&P 500 or its precursor from 1930 would have expanded to approximately $8.6 million as of last year. In contrast, an investment placed within the second group of stocks ranked by their yields during the same period would have ballooned to around $31 million.

Could you possibly improve further? Perhaps. Faber, who hosts the podcast, manages a collection of funds professionally that concentrates on A notion referred to as shareholder yield —The overall extra cash distributed by firms, including both share repurchases and reductions in net debt. By the close of 2023, they benchmarked their Cambria Shareholder Yield ETF against a group of 188 buyback or dividend funds monitored byMorningstar, all established fromMay 2013 onwards. TheETF outperformed themall.

The advantage can indeed be subtle. Allocating extra funds towards objectives beyond dividend distributions proves to be more effective within a taxable account—this being a significant factor behind why Berkshire Hathaway has refrained from issuing dividends for almost six decades now.

It may never become an aristocrat, but that appears to have turned out just fine.

Send your correspondence to Spencer Jakab Spencer.Jakab@wsj.com