Dividend Slices: Typical Returns

I calculated the returns of dividend slices B and D for today’s valuations (P/E10=28) and at typical valuations (P/E10=14).

Today’s Valuations

Value Weighting

Year 10 P/E10=28

Value B, most likely: 2.31%. Range: -4.7% to 9.3%.

Value D, most likely: 4.22%. Range: -1.8% to 9.2%.

Year 20 P/E10=28

Value B, most likely: 1.30%. Range: -1.7% to 4.3%.

Value D, most likely: 3.88%. Range: 0.9% to 7.9%.

Year 30 P/E10=28

Value B, most likely: 3.46%. Range: 1.5% to 6.5%.

Value D, most likely: 5.54%. Range: 3.5% to 8.5%.

Equal Weighting

Year 10 P/E10=28

Equal B, most likely: 5.18%. Range -1.8% to 10.2%.

Equal D, most likely: 6.90%. Range: 0.9% to 11.9%.

Year 20 P/E10=28

Equal B, most likely: 4.66%. Range: -0.3% to 8.7%.

Equal D, most likely: 6.42%. Range: 3.4% to 10.4%.

Year 30 P/E10=28

Equal B, most likely: 6.03%. Range: 3.0% to 9.0%.

Equal D, most likely: 7.45%. Range: 5.5% to 10.5%.

Typical Valuations

Value Weighting

Year 10 P/E10=14

Value B, most likely: 4.63%. Range: -2.4% to 11.6%.

Value D, most likely: 6.70%. Range: 0.7% to 11.7%.

Year 20 P/E10=14

Value B, most likely: 4.17%. Range: 1.2% to 7.2%.

Value D, most likely: 6.36%. Range: 3.4% to 10.4%.

Year 30 P/E10=14

Value B, most likely: 4.30%. Range: 2.3% to 7.3%.

Value D, most likely: 6.45%. Range: 4.5% to 9.5%.

Equal Weighting

Year 10 P/E10=14

Equal B, most likely: 6.92%. Range -0.1% to 11.9%.

Equal D, most likely: 8.20%. Range: 2.2% to 13.2%.

Year 20 P/E10=14

Equal B, most likely: 6.51%. Range: 1.5% to 10.5%.

Equal D, most likely: 7.89%. Range: 4.9% to 11.9%.

Year 30 P/E10=14

Equal B, most likely: 6.67%. Range: 3.7% to 9.7%.

Equal D, most likely: 7.96%. Range: 6.0% to 11.0%.

Interpretation

This attaches some numbers to our traditional knowledge about the advantage of selecting high dividend stocks.

The Value weighted slices correspond to what we would have expected from the stock market as a whole. Higher dividends (slice D as opposed to slice B) correspond to regular value stocks. Slices A and C would bring the overall returns into the range of the S&P500 index.

According to these numbers, when weighting by capitalization, choosing high dividend stocks will increase your expected real, annualized, total return by 2% at most valuations and all of the time frames examined (10, 20 and 30 years).

By the nature of the data, an Equal weighted slice corresponds to a traditional small capitalization slice. Equal D corresponds to small capitalization value stocks.

Maintaining equal weighting is a difficult task. It is not clear that an individual investor would be able to exploit the advantage of equally weighted high dividend stocks. David Dreman went into quite a bit of detail explaining why the advantage of small capitalization value stocks may be an illusion in his book “Contrarian Investment Strategies: The Next Generation.”

Still, traditional studies have favored small capitalization value stocks. Dividend yield is an attractive stock screen for value.

Have fun.

John Walter Russell
March 24, 2007