Do High-Dividend Strategies Add Value? Part I

Do High-Dividend Strategies Add Value? Part I

In the past, my practice has been to evaluate the performance of actively managed mutual funds from a given fund family, assessing their performance relative to the performance of comparable passively managed funds, as well as running regression analyses to see if they added value on a risk-adjusted basis. Today, I’m adopting a slightly different approach. Given the heightened interest in dividend strategies, I’ll take a look at how some of the leading providers of actively managed dividend-based strategies have performed.

There are basically two types of dividend strategies. The first is to invest in the stocks of companies that pay out relatively high dividends. This is another version of a value strategy. The second is to invest in the stocks of companies that have persistently grown dividends. This is more of a growth/profitability (or quality) strategy. As evidence of investors’ faith in dividend strategies, I found 28 U.S. mutual funds with the word “dividend” in their name and a 15-year track record. Combined, they had total assets under management of $139 billion. My focus in this article is on the high-dividend strategy. I’ll analyze the growing-dividend strategy in a follow-up piece.

As is my practice, to keep the list to a manageable number of funds and to ensure that I examine long-term results through full economic cycles, I’ll analyze the performance of the 10 largest funds ranked by assets under management for the 15-year period ending Dec. 31, 2015. Furthermore, when there is more than one share class of a fund available, I will use the lowest-cost shares that were obtainable for the entire period.

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This methodology creates substantial survivorship bias in the data. This occurs for two reasons. The first is that we are considering only funds that survived the full period, and roughly 7% of all mutual funds disappear each year. The second is that the funds with the most assets under management likely have the best track records. This is not only because higher returns increase assets, but also because investors tend to be performance chasers who believe that past performance is predictive, so it’s likely that strong past performance attracted more assets as well. Thus, the results are not truly reflective of what high-dividend investors actually earned using these actively managed funds. They are biased upward.

Keeping that bias in mind, the following table shows the performance data for the 10 largest actively managed high-dividend strategy funds. It also shows the returns of comparable funds from two leading providers of passively managed funds — an index fund from Vanguard and a structured portfolio from Dimensional Fund Advisors (DFA). (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.) The following returns data covers the 15-year period ending December 2015.


I should note that DFA funds can be purchased through some 529 and 401(k) plans but, generally, are available only through an advisor. An investor would incur fees from that advisor; those fees can vary greatly (in some cases they are very low) and cover the full range of financial planning services the advisor provides. Also, John Hancock recently introduced a series of ETFs that are managed through DFA (with expense ratios that differ from the DFA funds cited in this article). Investors can purchase those ETFs directly. Investors can directly purchase all Vanguard funds.

The performance of the 10 actively managed high-dividend funds was strong compared to the performance of Vanguard’s index fund. Seven of the 10 active funds outperformed, and the average outperformance was 1.1%. That’s quite an accomplishment since the active funds had to overcome an expense ratio difference of 0.52%.

However, when we compare the actively managed funds’ performance to that of DFA’s fund, we get a very different picture. Nine of the 10 funds underperformed, and the average was an underperformance of 1.3%. Note that the underperformance relative to the DFA fund was much greater than the expense ratio difference of 0.52%.

By Larry Swedroe, read the full article here.


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