Indeed, a US study by Ned Davies Research of returns generated by members of the S&P500 between 1972 and 2013 shows that investing in dividend growers achieved a 7.5 per cent average annualised return. In comparison, those investing in non-dividend payers achieved a 2.2 per cent return.
This represents a substantial premium, which might seem counter-intuitive for those who look for retained profits as a signal for future expansion and profit generation.
At a time when bond yields are low, equity strategies based on dividend payers have obvious appeal. They offer higher yield than investment-grade debt, can deliver lower volatility than non-dividend-based equity strategies and scope to benefit from potentially higher dividend distributions over time.
Meanwhile, the open-ended nature of equity ownership is better suited to investors whose need for income might extend for unknown periods.
Although some of the highest dividend-yielding stocks are heavily sought after, past experience suggests that investment strategies based on dividend growers – not high yielders – may be more effective in the long term.
Richard Carlyle is investment specialist at Capital Group
