Dividend Paying Stocks

Last year, dividend income investing was all the rage. Buying stocks with a high yield was virtually the only way to make money in most major equity markets. Plenty of funds, both active and passive, opened in an attempt to cash in on the interest. As it is an item of faith, following Modigliani and Miller, that investors should not care whether their cash is paid out to them in a cheque or remains in the company, that sounded like a good moment to try selling the whole phenomenon short.

Demand for yield ultimately came down to an extreme (if not unjustifiable) loss of trust in managers to look after their shareholders’ cash. And indeed, as markets rallied on false hopes for the eurozone crisis in the first months of this year, so high-yielding funds began to underperform. Not any more. Buoyed by the separate but related phenomena of extreme pessimism (which prompts investors into the kind of defensive stocks that tend to produce big dividends) and historically low yields on government debt and cash, those high-yielding funds are now ahead of the market for the year.

Source: The Big Picture

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