A dividend growth downer

Investors love their dividend stocks, but a new study suggests we’ve been calculating dividend growth all wrong



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It’s been a bad season for investment research.  Just a few weeks ago allegations were levelled that a long-running study of poor investor behaviour got the math wrong. Now it appears research supporting the notion that dividend growth provides an edge to investors may have suffered a similar fate.


Safer Canadian Dogs

The latest controversy comes courtesy of money manager Meb Faber, who recently alleged that Ned Davis Research’s study of dividend growth was “wrong, incomplete, and misleading.”

Update: In a recent revision to his article Mr. Faber has softened his accusation after a discussion with Ned Davis Research. He now says, “So, an entire generation of funds was sold on the premise of dividend growth outperformance. The problem is it’s misleading because it doesn’t tell the whole story.”

Faber says, “It turns out that Ned Davis (whom we love more than any quant shop on the planet) had been calculating the returns in an incorrect manner. (It may not be accurate to say “incorrect,” but the weighting method isn’t used by anyone else in the industry and NDR has since updated the charts to standardized formulas.)”

Update: He similarly reworked this paragraph and it turns out that it was inaccurate to say “incorrect”. He now says: “It turns out that Ned Davis (whom we love more than any quant shop on the planet) had been calculating the returns in a different way than what we’re currently used to. The Ned Davis statistics are based on geometrically weighted indices. When they created them over 15 years ago, geometric indices were common. However, the industry has since shifted to arithmetic indices. One of the reasons is that geometric means suppress the performance of outliers. Two years, ago Ned Davis introduced arithmetic weighted dividend charts.”

He then reported Ned Davis’ revised figures. Instead of outperforming by a large margin since 1973, dividend growers returned 12.89% annually while all dividend payers gained 12.83% per year and the equally-weighted S&P 500 climbed 12.35%. In other words dividend growth provided an insignificant edge over dividend payers more generally.

Another study, over a slightly different time period (from 1985 through 2015) indicated that picking dividend growth stocks from the Top 500 firms in the U.S. fared a little worse than the market when using market-cap weighted portfolios.

Update: After discussions with Alpha Architect it turns out the time period of the study was 1982 through 2015 and Mr. Faber’s article has been updated to reflect the change.

The results come as a blow to dividend growth investors. It’s sufficiently bad news that the usefulness of dividend—as a stock picking factor—should be viewed with a good deal of skepticism. (I’ll want to see a comprehensive research paper on the topic before putting the final nail in the dividend growth coffin because the results could change depending on the definitions and data used.)

On the other hand, high-yield stocks provided a modest level of outperformance, which should help to reassure the followers of the “Dogs” methods.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.
The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of April 26. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase—barring some calamity.

Name Price P/B P/E Earnings Yield Dividend Yield
CIBC (CM) $110.93 1.88 9.42 10.62% 4.58%
BCE (BCE) $62.70 3.79 19.06 5.25% 4.58%
TELUS (T) $45.35 3.38 21.91 4.56% 4.23%
Power (POW) $31.74 1.14 13.58 7.36% 4.22%
National Bank (NA) $53.69 1.82 13.49 7.41% 4.17%
Shaw (SJR.B) $28.89 2.57 12.96 7.72% 4.10%
Bank of Nova Scotia (BNS) $77.41 1.76 13.01 7.69% 3.93%
Agrium (AGU) $126.40 2.10 22.78 4.39% 3.77%
TD Bank (TD) $65.77 1.81 13.62 7.34% 3.65%
Royal Bank (RY) $95.47 2.17 13.28 7.53% 3.65%

Source: Bloomberg as of April 26, 2017


Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

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