Bristol Gate Capital Partners Inc.
45 St Clair Avenue West Suite 601
Toronto, Ontario M4V 1K9
  • Dividends: Evidence of Enhanced Returns

There is substantial empirical evidence to support the belief that dividend-paying securities generate enhanced returns. Over many decades, dividends have been a significant contributor to the total returns earned by equity securities.

In regularly reported research, Standard & Poor’s has shown that 44% of the monthly total return from United States equities from 1926 through 2009 came from dividends. Standard & Poor’s has also reported similar results for global equities.

Bristol Gate’s own research affirms this conclusion – a portfolio of purely dividend-paying stocks outperforms the broad equity markets. This table reports 20 years of results of the universe of dividend-paying stocks that form part of the S&P 500, the 500 largest US equities by market capitalization, as determined by Standard & Poor’s.

Annualized Returns to 2009
Years Dividend Stocks S&P 500 Universe Excess Return
1 36.6% 26.5% 10.1%
5 2.2% 0.4% 1.8%
10 7.3% -0.9% 8.2%
20 11.1% 8.2% 2.9%

Other research results have confirmed the dividend thesis and shown that it is not dependent upon a particular index or country. As reported by Michael Higgins in Dogs of the Dow, the ten highest-yielding securities in the Dow Jones Industrial Average of 30 industrial companies, rebalanced annually, outperform the average over time.

Robert D. Arnott’s research covered the period from 1802 to 2002, breaking equity returns into three components – inflation, valuation expansion, and dividends. He reported that 5.8% of the annual total return of 7.9% came from dividends. Arnott concluded that “unless corporate managers can provide sharply higher real growth in earnings, dividends are the main source of the real return we expect from stocks.” Lehman Brothers equity research group studied the 1000 largest market capitalization companies from 1970 to 2005. It rebalanced them quarterly and found that the top-yielding quintile generated a 13.7% annual total return, with a standard deviation of 15.5%. The bottom-yielding quintile returned 9% annually with a 29.1% standard deviation.