Do stocks with consistently increasing dividends earn higher long-term returns than other stocks. That’s the accepted wisdom. Take a look at this article from Meb Faber. He argues that the dividend growth dominance is based on a chart issued by a market research firm that used an unconventional method of computing the returns. Once a conventional method is used to calculate returns, dividend growers still do well but they don’t outshine the way they appeared to in the original chart. You should keep reading the article to learn why Faber also doesn’t like investing for yield in general.
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.)
Now, with its updated return calculations, Ned Davis shows dividend growers returning 12.89%, all dividend stocks 12.83%, and equal weight S&P 500 12.35%! (All beginning in 1973.)
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.