Do Dividend-Paying Stocks Make Better Investments?

Investors mistakenly believe that dividend-paying stocks make better investments. A company paying dividends is thought to have a more concrete valuation and the dividends are beloved by retirees who can visually see the dividends supporting their withdrawals. In other words, dividends are loved because you can take your dividends to the bank and spend them.
The math and science of factor investing are a little more complicated than this simplistic thinking though.
You can calculate a stock's dividend yield by dividing the annual dividend payout by the stock's current price. Dividend stocks are those that have a high dividend yield.
You can calculate a stock's price per earnings or P/E ratio by dividing the stock's current price by the historical or expected earnings. Value stocks are those that have a P/E ratio.
Dividend stocks are usually on the value end of the spectrum. For this reason, value and dividend-paying stocks often move in sync with one another. But all things being equal, it is value stocks which outperform, not dividend-paying stocks.
Consider three stocks with the following characteristics:
Value Stock V
$28 per share price $3 per share earnings $1 per share annual dividend payout And, therefore, the following metrics:
3.57% dividend yield ($1 / $28) 9.3 P/E ratio ($28 / $3) Blend Stock B
$28 per share price $2 per share earnings $1 per share annual dividend payout And, therefore, the following metrics:
3.57%... Read more