The Dividend Mailbox

You Don't Sacrifice Anything For Dividend Growth

January 11, 2022 Greg Denewiler Season 1 Episode 7
The Dividend Mailbox
You Don't Sacrifice Anything For Dividend Growth
Show Notes Transcript

Some investors may think that investing for dividends comes at a sacrifice. In this episode, we discuss how that couldn't be further from the truth.  However, there is an important caveat− investing for growth is NOT the same as investing for yield.  We'll also look at AT&T  to see this distinction and recognize that not all dividends are built the same.

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Greg Denewiler  0:11  

This is Greg Denweiler, and you're listening to another episode of The Dividend Mailbox, a podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks and make each year's check larger than the last. 


Greg Denewiler  0:39  

In this episode, we're going to continue to look at dividend growth and why it is so important. First of all, as a dividend investor and especially looking for growth, there's a habit that I have. Every day in the Wall Street Journal in the market section of the paper, there's a data table in there that shows all the companies the previous day that raised their dividends. As a dividend growth investor, there's nothing that makes you happier than looking in there and finding one of your companies showing up in the table that has raised its dividend. And there you go; you just got another raise. 


Greg Denewiler  1:21  

So anyway, continuing on. One of the things that I hope you get from this episode is, you know, do I really give up anything when I invest for dividends? So, let's look at just how the dividend sectors have performed in the last several decades. Standard and Poor's goes through and does several studies and in one of them, they looked at 1990 to 2021. And they looked at the average outperformance of the dividend aristocrats versus the S&P 500. Just to recap, the dividend aristocrats are the companies that have raised their dividends every year for at least the last 25 years. So, they've got a long term track record of dividend growth. Well, when you look at all the months, from 1990 to 2021, the aristocrats outperformed 52% of the time, which equates to an extra return of 0.12% over and above the S&P 500. When you look at up months, they outperform 43% of the time, which means they actually underperformed on up months by a -3.6%. So you don't earn quite as much money, which kind of makes sense because it's a little bit more of a conservative strategy. But here's the real- here's the real kicker here. And this is when you're looking at down months. The dividend aristocrats outperformed 69% of the time and they added an extra 1.05% in extra return. So that's where you start to get the outperformance and compounding always works better when you don't lose as much money. As an example, if you have a 50% loss, then you have to double your money- you have to make 100% to get back to even. 


Greg Denewiler  3:32  

Okay, so second of all, from 1999 to April of '21, let's look at the 15 worst months. And this is for the S&P composite, which is basically a broader index. Now when we look at the dividend aristocrats, their average worst of the 15 worst months, their average was negative 7.3%. When you look at the S&P composite, it was down 9.6%. When you look at the S&P 500, high dividend index, and what that is, basically, is just companies that pay a higher dividend but are not necessarily growing it. It was down 10.9%. So there, if you're just looking for a big dividend, a lot of times it doesn't pay off. And the dividend aristocrats again, show that they outperform when the market is not performing well. And now third, the dividend aristocrat yield, which currently forecasts for a yield of 2.4% and the S&P 500 is expected to have a dividend yield this year of 1.4%. Well, here's an interesting thing. When you look at the last 25 years, every year the dividend aristocrat yield has always been higher than the market. So, there again you get the performance, and you get the outperformance in down markets, and you also get extra income on top of it. You're not giving up anything to buy quality. 


Greg Denewiler  5:15  

On another note, let's look at the dividend aristocrat dividend cuts. When you look at 2019 to 2020, in a period where the economy was basically shut down for several months, the dividend aristocrats only had dividend cuts of 7.2% of the companies. But when you look at the S&P 500 high dividend index, 36% of them cut their dividends. And I think it sort of makes sense because a lot of times the higher dividend paying companies will have more debt, they're more leveraged, and their balance sheets are just not as strong as the companies that are growing their dividend. So, there's quite a bit more risk there when you don't look at quality, but just look at a high dividend. 


Greg Denewiler  6:09  

So now, let's take a little time and look at bull and bear markets. And we're going to compare quality high dividend stocks versus just the high dividend payers. Let's first look at the period of December 1996 to August of 2000. On a cumulative return basis, the S&P 500 quality high dividend index had a total return of 58%, while the S&P 500 high dividend index had a return of 54%. So fairly close. But the S&P 500 over that period of time was actually up 116%. So, it basically had about twice the return that the dividend indexes had. So, there you may be thinking, huh, what do you mean I don't give up anything? 


Greg Denewiler  7:03  

Well, let's go to the ".com" bubble when things turned down from 2000 to 2002. The quality high dividend index actually had a total cumulative return of a positive 10%. The high dividend index had a yield of 5%, basically half. But the S&P 500 had a negative 44% return. So, they're, when you don't go down as much, or you don't go down at all, it really helps your compounding. 


Greg Denewiler  7:39  

And then when we go to September of 2002 to 2007, where we are coming out of the recession going up to the financial crisis. You know, here, the quality high dividend index was up 128%. The high dividend index was up 126%, while the S&P 500 was only up 108%. So, there you actually have outperformance with the dividend indexes, and I think you always have to put these numbers into perspective. Probably the biggest reason for that outperformance from the dividend standpoint was because we're going into this era where interest rates were getting cut and where the Fed was trying to stimulate growth coming out of the 2002 recession. 


Greg Denewiler  8:30  

And then when we get to the global financial crisis, if you don't remember, in 2008, to 2009, basically everything correlated to one so there wasn't really any place to hide. Same goes for the for the dividends and the S&P 500. The quality high dividend index was down 43%, the high dividend index was down 64%. And the S&P 500 was down 51%. So, quality once again holds up better, but it still had a pretty dramatic sell off. But once again, I hate over stress this, the high dividend index was down the worst of the three indexes. A lot of times these higher dividend payers, they just don't have the financial discipline. 


Greg Denewiler  9:24  

Coming out of the late global financial crisis from February of 2009 to August of 2019. We had the quality high dividend index; it was up 486%. The high dividend index was up 566% and the S&P 500 was up 396%. So here the dividend indexes really started to outperform. Putting that into perspective, this is the point where we had the Fed driving interest rates down to 0% and they were in the bond market aggressively buying bonds- just throwing money out into the system trying to stimulate the economy. In this case of the high dividend index, what you had was a situation where these companies- where it became much easier for them to refinance their debt and investors were just starved for yield, pretty much going anywhere to try and find a higher income. 


Greg Denewiler  10:24  

Ned Davis research looked at total return just based on dividend policy from 1972 to 2014. The average return for dividend cutters, (and what that means is, it's a company that over this period of time at some point has cut their dividend), there they had a return of only .1%. The dividend payers but not dividend growers had a return 7.85% annually. And the S&P 500 equal weighted index, which is basically all the companies in the index having the same weight, they were up 7.93%. But when you look at dividend growers, they were up almost 10.4%. So here again, when you look at growth, it really is just back to sort of common sense that dividend growers also are a form of a growth stock. There you have the outperformance.


Greg Denewiler  11:28  

I'd like to look at one of the companies that that has been perceived as a high dividend payer and that's AT&T, (it's been that way now for probably a decade or more). And when you look at the yield of AT&T back in January of 2012, which is 10 years ago, it had a dividend yield of 6%. Let's go to the S&P 500 and back in January of 2012, the S&P 500 had a dividend yield of 2.1%. Just looking at that, you could say well, of course I want an extra three times my income. The problem is, and this is one of the things we want to look at and one of the things that this podcast really tries to stress, is just growth is a huge factor in total return over time. So when you look at the total return of AT&T for the last 10 years, it was 53%. But the S&P 500 earned 348%. You know, was the extra 4% a year and in dividend income really worth it? Well, the answer is no. Not even close.


Greg Denewiler  12:43  

What are some of the reasons? Because it's easy to look in the rearview mirror, but let's say well, how did I know back in 2012 that AT&T was maybe not my best choice? Again, you're looking at quality of balance sheet. And one of the things that was happening back in that period, was there were some periods where AT&T wasn't even covering their dividend. Because they had made some acquisitions. They were putting on a lot of debt and they had some write offs. You know, a company that has a negative payout ratio or doesn't earn their dividend at any one time is not necessarily a reason not to own it. But one of the things that we're stressing is sustainability. Well, when you look at AT&T, and you look at return on invested capital- that is basically all the assets of their balance sheet and what kind of return do they earn on those. Now, that's just a very simple explanation. But when we look at AT&T, back in 2006, 2007, '08, they had single digit, low single digit returns. 3%, 5%, and 8%. They actually had a negative in 2008. You really have to go all the way to 2017 before they get into the low double digits, and that was just a one-year return. Other than that, return on invested capital really lives in the in the mid to low single digits. It's pretty hard to create shareholder wealth when you have a very low return on your assets. One of the things that happened is they bought Time Warner, they bought DirecTV. What happens a lot of times with these companies is they just flat overpay for them. They issued shares to build that business, but they weren't getting the returns on it. Their total assets went from 110 billion in 2004, just four years later, their balance sheet ballooned all the way up to $265 billion. So that is one of the big hints of "is this company really going to be able to sustain dividend growth?" And I have to tell you, AT&T is a dividend aristocrat, but our focus is not just getting the growth of the dividend, we want at least 6%. You may remember from a previous podcast, what we really are trying to focus on is that dividend line, that line of the dividends of the S&P 500, and how that has grown 6% over the last 100 years. That's the line we want to be on and that's why we put so much focus on sustainability of dividends. So, I hope now you've got a little better feel that quality dividends do tend to outperform in down markets and the sustainability of a dividend tends to drive total return.


Greg Denewiler  16:02  

Another thing I want to mention, and just mention it real quick, because I think it's a scenario that that's going to play out here in the near future. We'll go into it in more detail in the next podcast. But we're going to look at an industry that I think is offering some great opportunities, partly because it is it's very cheap right now, and its oil and some of these big international oil stocks. You know, politically, they're really out of favor. And, you know, we're in this, it's probably going to be multi decades of transition, where we're trying to get to clean energy. But one thing you have to remember is energy is always going to be there in some form, because it's in about 90% of everything we touch and do. You may remember that Philip Morris was in an industry that was declining, but it's a pure function of if something's cheap enough, and the company has discipline, over the 50-year period, it's total return beat virtually everything else in the S&P 500. So, you can have an industry that is not necessarily a growth industry, but you can have companies in that industry that still do quite well. So, we're going to look at a few of the international oils where I think you've got quality and you've got potentially good dividend growth here in the near future.


Greg Denewiler  17:46  

If you liked today's podcast, please leave us a review and follow us on LinkedIn, Instagram, and Facebook. If you would like more information regarding dividend growth or just our style of investing, go to There you will find some of our previous podcasts and also our monthly newsletter. Past performance does not guarantee future results. Each investor should consider whether a strategy is right for them and consider all the risks involved. Dividend Stocks are volatile and can lose money.


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