Are Dividend Stocks A Separate Asset Class?

Dividends are a major component of total return. Over the past 80-odd years, they have accounted for more than 40% of the return of the S&P 500 and its predecessor index. And in periods of market decline -- the 1930s and the first decade of this millennium come to mind -- dividends provided the only returns that stock market investors saw. But few advisors consider dividend-paying stocks as a separate category. Perhaps the last thing that advisors want is another asset class to have to add to the portfolio mix. Yet in aggregate, this asset is easy to access, has been around as long as stocks have, and has demonstrable portfolio-enhancing characteristics.

Studies have shown that dividend-paying equities tend to outperform non-payers over time. Companies that increased dividends provided a 9.46% annual return -- vs. 6.98% for stocks with constant dividend payments and a 1.48% annual return for non-payers -- from December 31, 1972 through June 30, 2012, according to a study last year by Ned Davis Research, an institutional research firm. The returns were based on the monthly equal-weighted geometric average of total returns of S&P 500 Equal Weight Index component stocks, with components reconstituted monthly. Other studies have shown that dividend-paying stocks can be less volatile. A study focused on the 1987 stock market crash found that on Oct. 19, when the Dow plunged 22.6%, dividend payers declined one-third less than non-payers.

Source: Financial Planning

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