Dividend Safety: Watch The ROA Before The Payout Ratio
Published Nov 5, 2020 on Seeking Alpha

Seeking AlphaDividend StrategyDividend Safety: Watch The ROA Before The Payout RatioNov. 5, 2020 2:22 PM ET|| Includes: AMLP, BIZD, DVY, REM, RSP, SCHD, SDY, SPY, SPYD, VYMby: Fred PiardFred Piard Quantitative Risk & ValueExclusive market risk indicator paired with data-driven model portfolios.SummaryThe payout ratio is one of the most used factors in dividend stock analysis.
I compare it with the return on assets as a predictor of risks and returns in a dividend universe.
The return on assets is a clear winner.
All that glitters is not gold
Dividend investing is very popular for a reason: stocks paying dividends have outperformed the market on an aggregate basis for decades. The next table shows performance and risk statistics of an equal-weighted subset of large-cap stocks paying dividends, rebalanced every quarter between January 2000 and November 2020. The first line is the benchmark (RSP).
Jan 2000-Nov 2020, reset quarterly
Tot.Return
Ann.Return
Max Drawdown
Sharpe
Sortino
StdDev
S&P 500 Equal Weight (RSP)
440.34%
8.43%
-59.90%
0.47
0.62
17.46%
S&P 500, div.yield>0
559.16%
9.47%
-59.18%
0.54
0.71
16.55%

The dividend-paying subset improves the total return and lowers the risk measured in volatility (StdDev = standard deviation of monthly returns).
However, not all dividend investing styles are good. Chasing high yields is a risky one. Most high-dividend equity ETFs have lagged the S&P 500 index (SPY) in total return since inception (VYM, SDY, SCHD, DVY, SPYD). This year has been especially disastrous for high dividend industries: the iShares Mortgage Real Estate Capped ETF (REM), the ALPS Alerian MLP ETF (AMLP) and the VanEck Vectors BDC Income ETF (BIZD) are between 32% and 53% below their 52-week high.
The next table shows a significant increase in risk (drawdown and volatility) for the top 5% dividend payers.
Jan 2000-Nov 2020,... Read more