I recently came upon an interesting study from investment manager Blackrock. They analyzed the total returns for different categories of companies in the S&P 500, based on their dividend policy.
They looked at total returns per year for dividend growers and initiators, S&P 500, non-dividend payers and dividend cutters between 1978 and 2022. They compared the total returns between each category. In addition, they also included volatility for each group as well. You can view the results in the chart below:
Source: Blackrock
I have included the commentary from Blackrock verbatim below:
"Dividend-paying stocks have outperformed nondividend payers over the long term with less volatility, but companies that grow their dividends stand out most, as shown at the upper right. Statistically, a company’s record of and commitment to paying a dividend has instilled a measure of resilience. We find their managements are loath to cut a dividend and send a negative signal to the market, so dividend growers tend to be well-run companies built to weather diverse markets. Stocks with a history of dividend growth also have tended to fare better in a rising-rate environment versus the highest-yielding stocks (essentially “bond proxies”) that tend to follow bond prices down as rates rise."
The results of this study run contrary to the popular narrative I see today. Many investors do not understand the signaling value of increasing dividends. Only a quality company can afford to grow the business and also generate a growing amount of excess cashflows for many years, in order to establish a long track record of annual dividend increases.