I was reviewing my old files and re-visited an interesting paper from Standard & Poor's from a few years ago about the importance of dividends.
The paper states that dividends are important because:
1. They are a growing portion of personal income
2. More than one third of historical total returns came from dividends
3. Dividend paying stocks offer superior risk adjusted returns and potential for downside protection
I wanted to zoom in on this statement "Dividend paying stocks offer superior risk adjusted returns and potential for downside protection"
numerous academic studies have shown that dividend payers tend to outperform non-dividend payers across market cycles and offer higher risk-adjusted returns.
Dividends also play another important role during periods of volatility. While price returns can be either positive or negative, dividend incomes are by definition positive. Therefore, dividends provide investors with the opportunity to capture the upside potential while providing some level of downside protection in negative markets.
Fuller and Goldstein2 examined the return behavior of dividend paying and non-dividend paying firms in both up and down markets, from January 1970 to December 2007. The authors found that dividend paying firms outperformed non-dividend paying firms more in down markets than in up markets, with the results showing outperformance of 1% to 2% per month.
Dividends Act as a Cushion during Negative Equity Markets
Dividends also have lower volatility than Capital appreciation
The compounding effects of reinvesting dividends is undisputed.