Dividend-paying stocks have a lot going for them, chiefly their steady payouts. But that reliability can be a liability during bull markets.
Stocks in the Standard & Poor’s 500 index that don’t pay a dividend have done slightly better over the last year than those that do. If the bull market continues, some analysts say to expect the split in performance to widen.
Non-dividend payers in the S&P 500 index had an average gain of 24.6 percent over the 12 months through Jan. 31. Dividend payers had an average return of 24.3 percent, including their payments.
In 1999, the difference was stark. Non-payers in the S&P 500 rose an average of 89.7 percent thanks to the surge in technology stocks, which generally didn’t pay dividends. Dividend payers returned just 4.4 percent, on average.
"Dividends act as an anchor,” says Howard Silverblatt, S&P senior index analyst. Dividend-paying stocks "don’t move up as much during good times, but they don’t move down as much in bad times.”
During bull markets, investors get 80 percent of their gains from rising stock prices, with only 20 percent coming from dividends, J.P. Morgan strategist Thomas Lee wrote in a recent report. Instead of dividend yields, he suggests investors look at stocks with low price-to-earnings ratios, which measure a company’s stock price against its profit. Low ratios can offer opportunities for rising stock prices, if investors eventually pay more for each dollar of earnings from them.
To be sure, dividend stocks still have the better long-term track record, due to how much better they perform during bear markets. In 1990, for example, S&P 500 companies that don’t pay dividends fell an average of 29 percent, but payers dropped just 7.5 percent.
"Dividends are long-term holdings,” Silverblatt says. "You’re going to live on (the income), and a couple decades down the line, your children are going to sell (the stocks).”
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