Dividend ETFs: Examining Yields, Returns and Risk
March 5th at 2:29pm by Tom Lydon
Over the years, academic studies have pointed to strong performance in dividend-paying stocks, compared to non-paying stocks in almost every market segment. Adding to the growing evidence, Global X has found that the outperformance in dividend stocks and exchange traded funds increases along with dividend yield.
“Dividend paying stocks have, over time and based on numerous metrics, materially outperformed non-dividend paying stocks,” according to a Global X report.
The fund provider’s findings is in line with other studies conducted on dividend and non-dividend stocks.
“According to the excellent Credit Suisse Global Investment Returns Sourcebook 2011, from 1900 to 2010 the U.S. stock market experienced 6.17% annualized real growth,” according to Morningstar analyst Samuel Lee. “About 4.24 percentage points of the market’s return came from dividends, 1.37 percentage points from real per-share dividend growth, and a paltry 0.56 percentage points from price/dividend expansion (also known as the speculative return).”
Moreover, Global X found that the outperformance increases as dividend yield increases. Specifically, between 2003 and 2012, the 0% dividend group showed an annualized return of 10.8%, the 0%-2% group gained 11.9%, the 2%-6% group showed 12.4% returns, the 6%-10% group added 12.7%, the 10%-17% group rose 18.7% and the group with over 17% yields returned 15.9%. [Global Dividend ETFs: State Street Readies New Fund]
The fund sponsor also discovered that the risk of dividend paying stocks is lower than non-dividend paying stocks. Notably, the 6%-10% dividend payer group showed similar risk to the 0%-2% and 2%-6% group. The 10%-17% dividend payer group showed the highest risk-adjusted return. [Are ETF Investors Ignoring Important Dividend Payers?]
Lastly, Global X reveals that dividend stocks are still trading at discounts to their historical valuations.
Dividend ETFs are an important part to the shifting demographics. According to the census bureau, 13% of the U.S. population is classified as “retired” and this number is rising as the number of “baby boomers” reach retirement age. Furthermore, with yields in Treasuries at historical lows, retirees have become more reliant on riskier income opportunities.
For more information on dividends funds, visit our dividend ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.