Introduction

In recent years, dividends’ contribution to total return has been one of the most heavily-studied topics in the investment world. Several conclusions about the contribution that dividends make to total return have been claimed. However, these conclusions vary greatly. I have seen studies claiming that 90% of returns are attributed to dividends, several claiming 50% or more, and others arguing for a 30% contribution. Ironically, they all seem to be correct depending on the data-sets and/or timeframes being measured.

Nevertheless, I am on record of not being a fan of the typical academic study applied to finance.I have several problems with conclusions drawn from studies, but my major issue is with what I consider the over-generalized nature of how they are conducted.Consequently, I believe that although their conclusions may be valid based on the data as presented, I also believe they can be very misleading.

Here are but a few examples of conclusions that I contend can mislead investors. On December 6, 2010 the heads of Black Rock’s global equity team suggested that 90% of US equity returns over the last century have been delivered by dividends and dividend growth. A prominent money-management firm reported that according to Standard & Poor’s, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s, to a low of 14% during the 1990s. Standard & Poor’s themselves suggest that more than a third of the long-term total return of the S&P 500 can be attributed to dividends.And I have read other studies that conclude that dividend paying stocks dramatically outperform stocks that pay no dividends.

Now remember, the above are just a few samplings.In truth, there are numerous other studies that have presented varying conclusions about dividends’ contribution to total returns. As a result, I commonly come across investors quoting conclusions about dividends from studies or holding what I consider misguided opinions about dividends, dividend paying stocks and non-dividend paying stocks. Therefore, my objective with this article is to provide a more rational examination of the contributions, or their lack thereof, that dividends actually generate.

My primary position is that the contributions that dividends make vary greatly from one company to the next. This is aligned with my general position that it is a market of stocks and not a stock market. Therefore, rather than basing decisions on overly-generalized conclusions about the merits of dividend paying stocks over non-dividend paying stocks, I prefer a more individualized approach.

In other words, there are certain stocks where dividends matter a great deal, and there are certain stocks where dividends are completely irrelevant. My point being, that trying to associate dividends with returns is, in my opinion and experience, a flawed approach.Instead, I favor analyzing and evaluating the contributions that dividends have made to total return on a specific case-by-case basis. 

At this point, I want it to be clear that I am not either for or against dividends in the general sense. If income is your primary investment objective, then obviously dividend paying stocks make a great deal of sense. Moreover, if highest total return is your objective, then growth stocks might be your best choice. But most importantly, I intend to demonstrate that total return is not a function of whether a company pays a dividend or not. There are many factors that drive total return, and dividends are only one of them.

Debunking the Dividend Paying Stocks Produces Higher Total Returns Myth and Vice-Versa

As I suggested in the introduction, dividends’ contribution to total return has been one of the most widely-studied topics in finance. When conducting research for this article, I reviewed several studies on dividends. However, for the purposes of this article, I am going to utilize a study (white paper) titled Why Dividends Matter produced by Dr. Ian Mortimer and Matthew Page, CFA fund co-managers of Guinness Atkinson Funds.

Like most studies and white papers I’ve reviewed, I felt this presentation was very well done and I thought it made some excellent and important points about investing in dividend stocks. Moreover, I believe that their data as presented was accurate, and therefore, the conclusions drawn also accurate as presented. However, I believe the results, although accurate, are too general in nature to support absolute conclusions regarding dividend paying stocks versus non-dividend paying stocks.