Chasing Dividends Is A Mistake

Many investors prefer dividend-paying stocks, especially people who take an income, or cash flow, approach to investing -- as opposed to a total return approach, which I believe is the right approach. However, new research from Dimensional Fund Advisors shows that investors who expect dividends to protect them in tough times might be in for a rude awakening. The current era of historically very low yields on safe bonds has attracted many new adherents to the strategy of favoring dividend-paying stocks, especially the stocks of companies with either high or rapidly growing dividends.

Today, we'll take a look at the findings of a March 2013 study, "Global Dividend-Paying Stocks: A Recent History," produced by the research team at DFA. The study covered 23 developed markets over the period 1991-2012. According to the analysis, the average annual returns were 9.1 percent for dividend-paying stocks and 11.1 percent for nonpayers. However, the returns of nonpayers were more volatile than for dividend payers. The net result was that the annualized returns were the same 7.6 percent. However, by focusing on only dividend payers, an investor would exclude about 40 percent of firms, thereby sacrificing some diversification benefit.

Source: CBS News

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