Dividend yielding stock total return greater than non dividend stock?

[Gardener]

Had a long flight to read stocks for the long run.

I read this a few times to make sure, but I believe the author Siegel was saying total return even after accounting for taxes is still higher with dividend yielding stocks than those stocks that don’t provide a dividend.

“…Therefore from a tax standpoint, there is still bias for firms to deliver capital gains as opposed to dividend income. This is unfortunate since, as we shall note in chapter 9, dividend paying stocks generally yield better before and after tax returns than non dividend paying stocks.”

I would have thought the taxes incurred with dividend yielding stocks would cause it to have a lower total return. Siegel did not specify whether those dividends were reinvested or just taken as cash.

This was in the 4th edition written in 2008.

[mamster]

Could you please post a brief quote from the book? Otherwise we're just speculating.

[nisiprius]

Fifth edition, p. 137:

Therefore, from a tax standpoint, there is still a motivation for firms to deliver capital gains as opposed to dividend income. This is unfortunate since, as we shall note in Chapter 12, dividend-paying stocks generally yield better before- and after-tax returns than non-dividend-paying stocks.

p. 179:

DIVIDEND YIELDS

Dividends have always been an important criterion for choosing stocks, as Graham and Dodd stated in 1940:

Experience would confirm the established verdict of the stock market that a dollar of earnings is worth more to the stockholder if paid him in dividends than when carried to surplus. The common-stock investor should ordinarily require both an adequate earning power and an adequate dividend.

Graham and Dodd’s claim has been supported by subsequent research. In 1978, Krishna Ramaswamy and Robert Litzenberger established a significant correlation between dividend yield and subsequent returns.12 And more recently, James O’Shaughnessy has shown that in the period 1951 through 1994, the 50 highest-dividend-yielding large-capitalization stocks had a return that was 1.7 percentage points higher than the market. The historical analysis of the S&P 500 Index supports the case for using dividend yields to achieve higher stock returns. On December 31 of each year from 1957 onward, I sorted the firms in the S&P 500 Index into five groups (or quintiles) ranked from the highest to the lowest dividend yields and then calculated the total returns over the next calendar year. The striking results are shown in Figure 12-2.



The portfolios with higher dividend yields offered investors higher total returns than the portfolios of stocks with lower dividend yields. If an investor put $1,000 in an S&P 500 Index fund at the end of December 1957, she would have accumulated $201,760 by the end of 2012, for an annual return of 10.13 percent. An identical investment in the 100 highest dividend yielders accumulated to over $678,000, with a return of 12.58 percent....

And there's more.

It's funny, I never noticed this before. It certainly runs counter to Boglehead orthodoxy, and counter to the Modigliani-Miller "dividend irrelevance" theorem. I'm stunned to see Benjamin Graham stating explicitly that "a dollar of earnings is worth more to the stockholder if paid him in dividends than when carried to surplus."

It's consistent, though, with Siegel's "fundamental indexing" approach, as embodied by some of WisdomTree's ETFs.

[Gardener]

Sure, just added in the opening post.

[Gardener]

Fifth edition, p. 137:

Therefore, from a tax standpoint, there is still a motivation for firms to deliver capital gains as opposed to dividend income. This is unfortunate since, as we shall note in Chapter 12, dividend-paying stocks generally yield better before- and after-tax returns than non-dividend-paying stocks.

p. 179:

DIVIDEND YIELDS

Dividends have always been an important criterion for choosing stocks, as Graham and Dodd stated in 1940:

Experience would confirm the established verdict of the stock market that a dollar of earnings is worth more to the stockholder if paid him in dividends than when carried to surplus. The common-stock investor should ordinarily require both an adequate earning power and an adequate dividend.

Graham and Dodd’s claim has been supported by subsequent research. In 1978, Krishna Ramaswamy and Robert Litzenberger established a significant correlation between dividend yield and subsequent returns.12 And more recently, James O’Shaughnessy has shown that in the period 1951 through 1994, the 50 highest-dividend-yielding large-capitalization stocks had a return that was 1.7 percentage points higher than the market. The historical analysis of the S&P 500 Index supports the case for using dividend yields to achieve higher stock returns. On December 31 of each year from 1957 onward, I sorted the firms in the S&P 500 Index into five groups (or quintiles) ranked from the highest to the lowest dividend yields and then calculated the total returns over the next calendar year. The striking results are shown in Figure 12-2.



The portfolios with higher dividend yields offered investors higher total returns than the portfolios of stocks with lower dividend yields. If an investor put $1,000 in an S&P 500 Index fund at the end of December 1957, she would have accumulated $201,760 by the end of 2012, for an annual return of 10.13 percent. An identical investment in the 100 highest dividend yielders accumulated to over $678,000, with a return of 12.58 percent....

And there's more.

It's funny, I never noticed this before. It certainly runs counter to Boglehead orthodoxy, and counter to the Modigliani-Miller "dividend irrelevance" theorem. I'm stunned to see Benjamin Graham stating explicitly that "a dollar of earnings is worth more to the stockholder if paid him in dividends than when carried to surplus."

It's consistent, though, with Siegel's "fundamental indexing" approach, as embodied by some of WisdomTree's ETFs.

Wow, thank you for finding the quotes so quickly. I had to look through my kindle for my highlights.

Right, this runs counter to what Bogleheads commonly say.

[arcticpineapplecorp.]

The historical analysis of the S&P 500 Index supports the case for using dividend yields to achieve higher stock returns. On December 31 of each year from 1957 onward, I sorted the firms in the S&P 500 Index into five groups (or quintiles) ranked from the highest to the lowest dividend yields and then calculated the total returns over the next calendar year. The striking results are shown in Figure 12-2.

It's consistent, though, with Siegel's "fundamental indexing" approach, as embodied by some of WisdomTree's ETFs.

Based on the above "sorting" wouldn't that mean that there would be selling (potentially) every year, in which case wouldn't capital gains (and therefore TAXES) be paid as a result, which would NOT occur if merely holding the market (S&P500 or TSM)?

we can't look at the gross return, we have to take the net return into account. Of course the tax impact will be different for different people, but how can we eliminate that from the total return? Isn't the total return NET of fees, including turnover AND taxes?

This approach of sorting reminds me of the dogs of the dow or foolish four in which you simply buy the highest yielding/lowest priced stocks and simply rebalance (sell out of those that no longer fit the criteria) to buy the next year's highest yielding/lowest price stocks (which may or may not be the same). I never remember reading about the impact of taxes with these strategies. Perhaps it's better utilized in a tax advantaged account? Or Wisdom Tree's ETF wouldn't throw off capital gains because of the structure of ETFs?

[exodusNH]

Fifth edition, p. 137:

Therefore, from a tax standpoint, there is still a motivation for firms to deliver capital gains as opposed to dividend income. This is unfortunate since, as we shall note in Chapter 12, dividend-paying stocks generally yield better before- and after-tax returns than non-dividend-paying stocks.

p. 179:

DIVIDEND YIELDS

Dividends have always been an important criterion for choosing stocks, as Graham and Dodd stated in 1940:

Experience would confirm the established verdict of the stock market that a dollar of earnings is worth more to the stockholder if paid him in dividends than when carried to surplus. The common-stock investor should ordinarily require both an adequate earning power and an adequate dividend.

Graham and Dodd’s claim has been supported by subsequent research. In 1978, Krishna Ramaswamy and Robert Litzenberger established a significant correlation between dividend yield and subsequent returns.12 And more recently, James O’Shaughnessy has shown that in the period 1951 through 1994, the 50 highest-dividend-yielding large-capitalization stocks had a return that was 1.7 percentage points higher than the market. The historical analysis of the S&P 500 Index supports the case for using dividend yields to achieve higher stock returns. On December 31 of each year from 1957 onward, I sorted the firms in the S&P 500 Index into five groups (or quintiles) ranked from the highest to the lowest dividend yields and then calculated the total returns over the next calendar year. The striking results are shown in Figure 12-2.



The portfolios with higher dividend yields offered investors higher total returns than the portfolios of stocks with lower dividend yields. If an investor put $1,000 in an S&P 500 Index fund at the end of December 1957, she would have accumulated $201,760 by the end of 2012, for an annual return of 10.13 percent. An identical investment in the 100 highest dividend yielders accumulated to over $678,000, with a return of 12.58 percent....

And there's more.

It's funny, I never noticed this before. It certainly runs counter to Boglehead orthodoxy, and counter to the Modigliani-Miller "dividend irrelevance" theorem. I'm stunned to see Benjamin Graham stating explicitly that "a dollar of earnings is worth more to the stockholder if paid him in dividends than when carried to surplus."

It's consistent, though, with Siegel's "fundamental indexing" approach, as embodied by some of WisdomTree's ETFs.

Wow, thank you for finding the quotes so quickly. I had to look through my kindle for my highlights.

Right, this runs counter to what Bogleheads commonly say.

You need to keep in mind, though, that stocks have paid progressively lower dividends. Even into the 90s, selling stocks to get money incurred large fees, especially if you weren't selling them in lots of 100. You could incur the equivalent of $100s in fees to get access to $1000.

Dividends (and DRIP) helped compensate for that because you could get a 5-10% payout without having to incur the hassle and expense of selling.

[suemarkp]

How are you going to pick the high dividend yielders, and are you going to reevaluate the list each year if manually picking? If you find a suitable fund, you could compare it's return to the SP500 or total market funds.

For me, I used VYM for a while (Vanguard high dividend yield fund). It's returns generally were less volatile than the SP500. It had lower highs, but lost less in bad years. However, looking at total return over 5 and 10 years in the past, VYM was a few percentage points behind the SP500 in CAGR. Maybe over a 30 or 50 year look back it would be different. Growth has been favoring value for quite a while now.

VYM was an Edward Jones pick they suggested to use to augment the SP500 fund it also held. VYM was one of the dogs that prompted me to finally move that account from EJ to Fidelity. I don't hold dividend focused funds anymore.

[nisiprius]

(Shrug) We argue about dividend stocks all the time in this forum. It's my belief that dividend stocks have about the same total return as the rest; that a dollar is a dollar, and a dollar in dividends is no better or worse than a dollar of capital appreciation. (Under current tax structure, worse).

But, yes, to my surprise Siegel is clearly on the other side, and apparently agrees with Benjamin Graham that "a dollar of earnings is worth more to the stockholder if paid him in dividends."

In Stocks for the Long Run 5/E even a mention of the Modigliani-Miller theorem is conspicuously absent.* I really think if he's going to claim superiority for dividend stocks he really ought to explain why the theorem doesn't apply.

*A search for "modigliani" gives no results. A search for "miller" gives three results for Bill Miller, but none for Merton Miller.

[bendix]

A company that pays a high dividend basically says "Here, have our money, apparently you know better how to invest it than we do!" and the SP500 beat all the "high dividend" ETFs that I am aware of.

[TipsQuestions]

“…Therefore from a tax standpoint, there is still bias for firms to deliver capital gains as opposed to dividend income. This is unfortunate since, as we shall note in chapter 9, dividend paying stocks generally yield better before and after tax returns than non dividend paying stocks.”

I couldn't say much about "non dividend paying stocks", since those are relatively rare and in concentrated industries, and thus there are no zero div mutual funds where audited real world performance can be tracked. But if we're talking lower vs higher div paying stocks/funds, common sense, as well as decades of actual fund returns, confirm markets haven't left us a trillion dollar free lunch in high div payers. Sorry, Chapter 9.

[adave]

Some might say the dividend creates discipline in a management team and they are less inclined to waste the money on dumb or wasteful things. I hold one dividend ETF (SCHD) but I’m not sure about it.

[tibbitts]

A company that pays a high dividend basically says "Here, have our money, apparently you know better how to invest it than we do!" and the SP500 beat all the "high dividend" ETFs that I am aware of.

Well, if it's as obvious as you suggest, why wouldn't everyone buy only an index that excluded the equities held by those "high dividend" ETFs?

[Jack FFR1846]

BRK-A from 1957 to 2012 to match the chart started at just under $8 and finished at about $135,000. No dividends.

[dkturner]

Kenneth French’s data confirms the difference. From 1976 through 2022 non-dividend paying stocks have produced an annualized return of 11.7%, with a standard deviation of 25.7%. For all dividend paying stocks the returns have been 12.4% with a standard deviation of only 15.0%. Prior to 1976 the difference in return and standard deviation of non-dividend vs. dividend paying stocks was much greater.

[arcticpineapplecorp.]

Some might say the dividend creates discipline in a management team and they are less inclined to waste the money on dumb or wasteful things. I hold one dividend ETF (SCHD) but I’m not sure about it.

but some might also say that if the dividends are returned because management has no new good ideas (to expand the business) why would you want to invest in a company that has no new good ideas and won't expand their business?

we invest in stocks for growth, not for income. If you want consistent income (from dividends) you should buy bonds for their consistent income (dividend/coupon) payments.

[firebirdparts]

Super interesting, especially the idea suggested by the statistics-of-the-eye that dividends are correlated with total return.

Really, we need to know how you define that and how you'd have to invest to create that chart. Some of the big dividend payers obviously are going bankrupt later, so there's some point where they go away, and it would be interesting to see how that works in the data.

The comparison with "non dividend paying stocks" is less interesting. Lots of trash in that barrel for sure.

[rkhusky]

Kenneth French’s data confirms the difference. From 1976 through 2022 non-dividend paying stocks have produced an annualized return of 11.7%, with a standard deviation of 25.7%. For all dividend paying stocks the returns have been 12.4% with a standard deviation of only 15.0%. Prior to 1976 the difference in return and standard deviation of non-dividend vs. dividend paying stocks was much greater.

But what is the difference in the modern era of widely accessible computing and the Internet - about 1995 or 2000 onward?
Low dividend payers probably include a lot of growthy tech stocks.
Also interesting to see 2012-2024.

[avalpert1]

Correlation vs. causation... In the past, it could be that dividend-paying stocks had higher returns than non-dividend-paying stock but that doesn't mean that they did so because they paid a dividend. If stocks with the characteristics that did drive higher returns (might those characteristics be something captured as 'value'...) switched from dividends to share repurchases, would that lower their after-tax returns or increase them?

I don't recall Seigel providing any real evidence it would lower them...

[exodusNH]

Kenneth French’s data confirms the difference. From 1976 through 2022 non-dividend paying stocks have produced an annualized return of 11.7%, with a standard deviation of 25.7%. For all dividend paying stocks the returns have been 12.4% with a standard deviation of only 15.0%. Prior to 1976 the difference in return and standard deviation of non-dividend vs. dividend paying stocks was much greater.

But what is the difference in the modern era of widely accessible computing and the Internet - about 1995 or 2000 onward?

This was my point.

If you incur a $750 (inflation adjusted) fee for selling 15 shares (odd lots), dividends are very important.

Since the advent of commission-free trading, plus tax code changes over 50 years, they're not as important.

[dkturner]

Kenneth French’s data confirms the difference. From 1976 through 2022 non-dividend paying stocks have produced an annualized return of 11.7%, with a standard deviation of 25.7%. For all dividend paying stocks the returns have been 12.4% with a standard deviation of only 15.0%. Prior to 1976 the difference in return and standard deviation of non-dividend vs. dividend paying stocks was much greater.

But what is the difference in the modern era of widely accessible computing and the Internet - about 1995 or 2000 onward?
Low dividend payers probably include a lot of growthy tech stocks.
Also interesting to see 2012-2024.

For the period 1995 through 2022: Non-dividend paying stocks 9.7% annualized return, 26.9% standard deviation
All dividend paying stocks 11.0% annualized return, 16.3% standard deviation

For the period 2000 through 2022: Non-dividend paying stocks 5.1% annualized return, 26.4% standard deviation
All dividend paying stocks 8.4% annualized return, 15.9% standard deviation

This data is from Kenneth French’s library at Dartmouth and its capitalization weighted. I don’t have the data for 2023. I couldn’t find it on French’s website when I tried to update my file in early 2024. The great 2000-2022 tech stock meltdown took its toll on non-dividend paying stocks.

[Django Ii]

The big change in the 1990's was capital gains rates were lowered below income tax rates.

See the Taxpayer Relief Act of 1997:
https://www.taxpolicycenter.org/laws-pr ... -1990-1999

[rkhusky]

Kenneth French’s data confirms the difference. From 1976 through 2022 non-dividend paying stocks have produced an annualized return of 11.7%, with a standard deviation of 25.7%. For all dividend paying stocks the returns have been 12.4% with a standard deviation of only 15.0%. Prior to 1976 the difference in return and standard deviation of non-dividend vs. dividend paying stocks was much greater.

But what is the difference in the modern era of widely accessible computing and the Internet - about 1995 or 2000 onward?
Low dividend payers probably include a lot of growthy tech stocks.
Also interesting to see 2012-2024.

For the period 1995 through 2022: Non-dividend paying stocks 9.7% annualized return, 26.9% standard deviation
All dividend paying stocks 11.0% annualized return, 16.3% standard deviation

For the period 2000 through 2022: Non-dividend paying stocks 5.1% annualized return, 26.4% standard deviation
All dividend paying stocks 8.4% annualized return, 15.9% standard deviation

This data is from Kenneth French’s library at Dartmouth and its capitalization weighted. I don’t have the data for 2023. I couldn’t find it on French’s website when I tried to update my file in early 2024. The great 2000-2022 tech stock meltdown took its toll on non-dividend paying stocks.

Thanks, that’s interesting. To dig in further one would look to see if factors like value can also explain the difference, as noted by avalpert1.

[9-5 Suited]

It’s commonly noted that value stocks in the three factor model have higher dividend rates than their growth counterparts. So if one believes in the FF research and the value premium, one should also expect some loose correlation between dividends and return. I don’t believe high dividends to be the source of that return, though. From an ex-ante perspective, I see minimal benefit to selecting a high dividend fund as a sort of value proxy when so many low-cost value index options exist.

It’s plausible that corporate managers are bad stewards of money retained for corporate investment. But I wouldn’t bet on that. If it were obvious, then the market would already price that accordingly.

[dkturner]

Correlation vs. causation... In the past, it could be that dividend-paying stocks had higher returns than non-dividend-paying stock but that doesn't mean that they did so because they paid a dividend. If stocks with the characteristics that did drive higher returns (might those characteristics be something captured as 'value'...) switched from dividends to share repurchases, would that lower their after-tax returns or increase them?

I don't recall Seigel providing any real evidence it would lower them...

Right. Obese people don’t have shorter life expectancies because they’re obese, it because of a huge variety of medical issues.

[Tamalak]

If the market was perfectly rational and efficient, it would price dividends according to the average capital gains tax paid by the average dividend.

That would mean if your tax bracket is lower than the average invested dollar (I think this is likely.. isn't the average skewed rich?) it would make theoretical sense for you to aim for dividend stocks. If your tax bracket were higher than the average invested dollar, it would make sense for you to avoid dividends.

[seajay]

BRK-A from 1957 to 2012 to match the chart started at just under $8 and finished at about $135,000. No dividends.

Conglomerate that receives lots of dividends but doesn't pay them out. Similar to a ETF that has both distributing and accumulation share options.

I agree with retained earnings being more inclined to be in part wasted, budgets allocated and a spend-it-or-lose-it internal practice. In contrast to having to tighten belts in order to meet payment of a existing level of dividends, or increase the amount. All else being equal the larger (retained earnings) is inclined to grow slower than the smaller (distributing) case.

[dkturner]

Kenneth French’s data confirms the difference. From 1976 through 2022 non-dividend paying stocks have produced an annualized return of 11.7%, with a standard deviation of 25.7%. For all dividend paying stocks the returns have been 12.4% with a standard deviation of only 15.0%. Prior to 1976 the difference in return and standard deviation of non-dividend vs. dividend paying stocks was much greater.

But what is the difference in the modern era of widely accessible computing and the Internet - about 1995 or 2000 onward?
Low dividend payers probably include a lot of growthy tech stocks.
Also interesting to see 2012-2024.

For the period 1995 through 2022: Non-dividend paying stocks 9.7% annualized return, 26.9% standard deviation
All dividend paying stocks 11.0% annualized return, 16.3% standard deviation

For the period 2000 through 2022: Non-dividend paying stocks 5.1% annualized return, 26.4% standard deviation
All dividend paying stocks 8.4% annualized return, 15.9% standard deviation

This data is from Kenneth French’s library at Dartmouth and its capitalization weighted. I don’t have the data for 2023. I couldn’t find it on French’s website when I tried to update my file in early 2024. The great 2000-2022 tech stock meltdown took its toll on non-dividend paying stocks.

Thanks, that’s interesting. To dig in further one would look to see if factors like value can also explain the difference, as noted by avalpert1.

That’s right. “Value” stocks are quite closely associated with the payment of dividends. There is also an issue of conservative investors shying away from non-dividend paying stocks. When a successful corporation initiates the payment of a dividend the press release often notes that it will result in the addition of more potential investors.

[dkturner]

So if one believes in the FF research and the value premium, one should also expect some loose correlation between dividends and return. I don’t believe high dividends to be the source of that return, though. From an ex-ante perspective, I see minimal benefit to selecting a high dividend fund as a sort of value proxy when so many low-cost value index options exists.

That’s not what French’s data shows. As an example between 1928 and 2022 the lowest 30% of dividend paying stocks had annualized total returns of 9.2% vs. 11.0% for the highest 30% of dividend paying stocks. French’s data is capitalization weighted. Things haven’t changed much lately. From 1995 through 2022 the returns are 9.6% vs 11.0%.

[rkhusky]

Kenneth French’s data confirms the difference. From 1976 through 2022 non-dividend paying stocks have produced an annualized return of 11.7%, with a standard deviation of 25.7%. For all dividend paying stocks the returns have been 12.4% with a standard deviation of only 15.0%. Prior to 1976 the difference in return and standard deviation of non-dividend vs. dividend paying stocks was much greater.

But what is the difference in the modern era of widely accessible computing and the Internet - about 1995 or 2000 onward?
Low dividend payers probably include a lot of growthy tech stocks.
Also interesting to see 2012-2024.

For the period 1995 through 2022: Non-dividend paying stocks 9.7% annualized return, 26.9% standard deviation
All dividend paying stocks 11.0% annualized return, 16.3% standard deviation

For the period 2000 through 2022: Non-dividend paying stocks 5.1% annualized return, 26.4% standard deviation
All dividend paying stocks 8.4% annualized return, 15.9% standard deviation

This data is from Kenneth French’s library at Dartmouth and its capitalization weighted. I don’t have the data for 2023. I couldn’t find it on French’s website when I tried to update my file in early 2024. The great 2000-2022 tech stock meltdown took its toll on non-dividend paying stocks.

Thanks, that’s interesting. To dig in further one would look to see if factors like value can also explain the difference, as noted by avalpert1.

That’s right. “Value” stocks are quite closely associated with the payment of dividends. There is also an issue of conservative investors shying away from non-dividend paying stocks. When a successful corporation initiates the payment of a dividend the press release often notes that it will result in the addition of more potential investors.

As you noted, 2000-2002 was bad for tech stocks. It was also relatively good for value stocks. Since then, ie last 20 years, value hasn’t been doing as well.

[dkturner]

But what is the difference in the modern era of widely accessible computing and the Internet - about 1995 or 2000 onward?
Low dividend payers probably include a lot of growthy tech stocks.
Also interesting to see 2012-2024.

For the period 1995 through 2022: Non-dividend paying stocks 9.7% annualized return, 26.9% standard deviation
All dividend paying stocks 11.0% annualized return, 16.3% standard deviation

For the period 2000 through 2022: Non-dividend paying stocks 5.1% annualized return, 26.4% standard deviation
All dividend paying stocks 8.4% annualized return, 15.9% standard deviation

This data is from Kenneth French’s library at Dartmouth and its capitalization weighted. I don’t have the data for 2023. I couldn’t find it on French’s website when I tried to update my file in early 2024. The great 2000-2022 tech stock meltdown took its toll on non-dividend paying stocks.

Thanks, that’s interesting. To dig in further one would look to see if factors like value can also explain the difference, as noted by avalpert1.

That’s right. “Value” stocks are quite closely associated with the payment of dividends. There is also an issue of conservative investors shying away from non-dividend paying stocks. When a successful corporation initiates the payment of a dividend the press release often notes that it will result in the addition of more potential investors.

As you noted, 2000-2002 was bad for tech stocks. It was also relatively good for value stocks. Since then, ie last 20 years, value hasn’t been doing as well.

That’s right. I don’t have the data for 2023 (which was a good growth and poor value year) but for the 2003-2022 twenty year period non-dividend stocks also outperformed all dividend stocks 11.2 annualized to 10.1. Interestingly the highest yielding 30% of dividend paying stocks outperformed the lowest 30% 9.5% to 8.9%.

Everything is period dependent. Stock and bond correlations are really wild.

[9-5 Suited]

So if one believes in the FF research and the value premium, one should also expect some loose correlation between dividends and return. I don’t believe high dividends to be the source of that return, though. From an ex-ante perspective, I see minimal benefit to selecting a high dividend fund as a sort of value proxy when so many low-cost value index options exists.

That’s not what French’s data shows. As an example between 1928 and 2022 the lowest 30% of dividend paying stocks had annualized total returns of 9.2% vs. 11.0% for the highest 30% of dividend paying stocks. French’s data is capitalization weighted. Things haven’t changed much lately. From 1995 through 2022 the returns are 9.6% vs 11.0%.

Showing that dividend paying stocks had higher returns wouldn't negate the critique that the higher dividends aren't the causal factor, unless he controlled for other sources of return like the value premium. But even then, there's only so much you can glean from past data, even decades of it. You could construct other arbitrary criteria like "companies that start with the letter A" and due to the success of Apple, Amazon, and Alphabet you'd see huge outperformance.

I don't see the plausibility of high dividends being a reliable factor - in terms of a source of an expected risk premium - that would suggest an ex-ante higher expected return. All the data being shown is ex-post, and of course it's likely the two would behave differently in any given sample. The risk story makes no sense to me, so assigning a "dividend premium" makes no sense to me by extension.

[Edit to clarify the last comment: If high-dividend stocks don't have a rational reason, on their own, to be riskier, then asserting they have higher expected return is a claim to a free lunch so obvious it would violate pretty much everything I believe about markets for it to be true. That's not a reason it's untrue, per se, but it's a good reason for me to ignore it for my own investing. I just don't think there's an unexpolited market inefficiency unknown to the most sophisticated institutitional money mangers that all you need to do is sort by dividend payout rate and you have a free money printer.]

[FactualFran]

Using total return data at hand for the S&P 500 and S&P 500 Value indexes, here is what John Bogle called a Telltale Chart. It shows the ratio of end of year balances of accounts in the two investments.



For a span of years when the line is higher at the end of the span than at the start of the span, the S&P 500 index had a higher total return. For a span of years when the line is lower at the end of the span than at the start of the span, the S&P 500 Value index had a higher total return.

The S&P 500 Value index is not a high dividend index, but the dividend yield is higher than that of the S&P 500 index. I do not have the total returns of a High Dividend index that would be directly comparable to the S&P 500 index.

[seajay]

(Shrug) We argue about dividend stocks all the time in this forum. It's my belief that dividend stocks have about the same total return as the rest; that a dollar is a dollar, and a dollar in dividends is no better or worse than a dollar of capital appreciation. (Under current tax structure, worse).

A stock that pays dividends loses that capital out of its bottom line. A stock that retains earnings, pays no dividends and the investor sells some shares ... DIY dividends (to the amount and time that suits each investor) sees that 'dividend' being funded by other investors, the stock itself is unaffected. If the share price is at a premium to its book-value then the buyer of those shares might be paying twice (whatever) the stocks book-value for those shares.