Investors Who Seek Alpha Should Seek Out Dividend Stocks

“The deepest sin against the human mind is to believe things without evidence.” Thomas H. Huxley. I hate to be one of those bores who keeps repeating the same thing repeating the same thing, but yet more research shows that dividend stocks generate simply superb long-run returns, not only beating the market but absolutely walloping non-dividend payers. What’s so intriguing about this newest research (pdf) is it also calculates dividend stocks’ alpha – a fancy rocket-science statistic measuring risk-adjusted excess returns. While mathematically complex, alpha’s purpose is straightforward. It provides an objective measure of whether investors taking higher risks are being rewarded with higher returns. In a stunning reversal of the conventional tenets of risk vs. reward, the research shows dividend stocks clobber the market, yet expose investors to substantially less risk. Is that a sweet deal, or what? The study, conducted by Miller-Howard, also digs into risk vs. returns for low, medium and higher-yielding stocks. A bit of bad news: high-yielders were the one classification of dividend stocks with a negative alpha. Good returns, but at too high a risk. Let’s look at the study background, then the results. Of course, this is just one study (one more study, to be precise). But that doesn’t mean we can’t add it to our store of evidence and consider it in the context of our individual goals and judgments. The research crunched numbers from 1993 through 2007, spanning the ramp-up to the tech-bubbly late 1990s (which was no fun for dividend investors), the subsequent crash and the five-year bull market rebound. Some might argue that ending the study before the 2008-2009 dividend meltdown unfairly skews results. But high-quality dividend stocks, represented by ETFs indexed to Dividend Aristocrats (SDY) and Dividend Achievers (PFM), actually outperformed the market during that downturn.... Read more