High-dividend-paying stocks tend to outperform all other equities during long time horizons, but they are the worst performers when interest rates increase

June 9, 2014 Leave a comment

Dividends Great for Long Term, but Beware Rising Rates

High-dividend-paying stocks tend to outperform all other equities during long time horizons, but they are the worst performers when interest rates increase.

By Timothy Strauts | 05-29-2014 10:00 AM

Tim Strauts: Today we’re going to look at how dividend stocks have performed in different interest-rate periods. In this chart, you can see we’ve broken up the equity universe into four buckets. The highest 30% bucket is the 30% of stocks with the highest dividend yield, going all the way down to the no-dividend bucket of companies that pay no dividends.

Then we looked at interest rates, and we looked at the period between 1927 and end of 2013. In the falling-interest-rate group, we took the 20% of months that had the largest decrease in interest rates. The neutral group is the 60% of months that were in the middle. And then [there is rising rates group] which is the 20% of months that had largest increase in rates.

What we found is that over a full period of 1927-2013, that high-dividend stocks had the highest returns. But in the periods of rising interest rates they actually were the worst-performing category, and actually companies that didn’t pay a dividend outperformed by a substantial margin. Although dividend stocks may be a great investment for the long term, if rates rise quickly they may perform poorly.

 

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment