Monday, March 9, 2015

What is Going On With Dividend Paying Stocks

In an era of low interest rates the dividend stock trade is real interesting.  If you can get a higher yield on a good quality stock than you can on a 10 year Treasury Bond it almost seems like a no brainer.   We all know that the Fed will eventually start raising interest rates, we just don't know when and by how much.  We also all know that when they do that it will hurt the prices of bonds, but what about dividend stocks?  The past couple of jobs reports have stoked fears of an earlier than expected Fed tightening.  Around both of those reports we have seen dividend stocks sell off quite a bit.  Year to date they are not doing that well.  Below is the year to date return (as of 3/6/15) of a couple of popular dividend stock ETFs compared to the S&P 500:

iShares Select Dividend (DVY)  -2.72%
Schwab US Dividend Equity (SCHD) -.28%
Vanguard Dividend Appreciation (VIG) .14%
S&P 500 1.00%

So what does history tell us about dividend stocks during rising rate environments?  Not that much.  I found a research paper from O'Shaughnessy that looked at the performance of dividend paying stocks over every period of rising rates

Overall they found that dividend stocks underperformed the market but the results were not that conclusive.  Even more interesting is that they found using a shareholder yield approach outperformed the market.  Shareholder yield is something we have been interested in for a while.  It looks at all the ways that companies return cash to shareholders---dividends, stock buybacks, and debt retirement.  We have just come out with a new tactical dividend stock strategy that uses shareholder yield as one of our metrics.

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