Attention Dividend Investors: You Will Miss Out

I've got bad news for you, dividend investors. You're losing. And as long as the bull market continues, you're going to continue to lose.

Since the catastrophic financial and housing collapse of 2008, investors have latched onto dividend stocks like so much flotsam in the aftermath of the Titanic's crash. It's been so extreme that it's inspired multiple Fool writers to muse about the presence of a dividend bubble.

In the midst of all of this, we're in the middle of a bull market. And if one thing is clear, companies that pay higher dividends tend to underperform in bull markets.

Source: S&P Capital IQ.

It's no exception this time around. Since the beginning of 2009, stocks paying a low dividend or no dividend at all have returned 94% on average, while stocks with a higher yield have climbed just 88%. And that's a dividend-adjusted return, mind you. The Dow Jones Industrial Average (INDEX: ^DJI  ) , which is weighted toward the very largest companies -- most of which are dividend-payers -- has lagged even further.

This is your challenge
United Technologies
(NYSE: UTX  ) and Procter & Gamble (NYSE: PG  ) are a couple great dividend stocks. Going back to 1995, both stocks have produced outstanding returns -- United Technologies has had compounded annual returns of 17%, while P&G has delivered a none-too-shabby 11%. Both are large companies today, which might lead some to conclude that the days of attractive returns are behind them, but both were already among the largest companies back in 1995. Today, they still stand out as high-quality, well-run businesses that seem poised to continue delivering attractive returns to investors.

But consider, for a moment, a stock such as Buffalo Wild Wings (Nasdaq: BWLD  ) that has no dividend to speak of. The company behind the stock is a very successful, fast-growing, wing-themed restaurant chain. The business produces a handsome amount of cash flow, but dividends -- or share buybacks for that matter -- would be imprudent because the company spends a lot on growing the business.

While B-Dubs doesn't offer its investors a dividend payout, its blazing-hot growth can lead to days like Feb. 8, when the stock jumped 17% in a single day thanks to blowout earnings. For the fourth quarter, earnings grew 33% from the prior year and management projected that next year earnings will grow another 20%.

For many of the very best dividend-paying stocks, you're just not going to see numbers like those. The longer the bull market continues, the more opportunities dividend stock investors will have to feel like they're missing out on as growth-focused, dividend-free stocks give their shareholders that wonderful "rich in a day" feeling.

Hang in there!
To be clear, dividend stocks aren't the right answer for everyone all the time. Though I'm a big fan of dividends myself, I also use different strategies for part of my personal portfolio. And with a nod to Fool co-founder David Gardner and the great team at Motley Fool Rule Breakers, if dividend stocks were the only way to beat the market, then somebody forgot to tell them, because that newsletter has absolutely smashed its benchmark.

But for those who do want to stick with dividend stocks, here's the good news: The selling points that have drawn so many to dividend stocks are true (except the part about eternal youth, sorry).

I started this article by noting that stocks that pay little or no dividend have, on average, beaten higher-payout stocks during bull markets. That's true, but when markets turn, the converse is true, and sometimes to an even greater degree. During the down market from 2000 to 2003, the average higher-yield dividend stock returned a positive 32%, while the average low or no dividend stock lost 19%. During the sharp plunge from 2008 to 2009, the higher dividend group lost 31%, but the low or no dividend group lost 43%. And it's worth noting that the higher dividend group was hurt by the fact that it included many of the hardest-hit financial companies.

But it gets even better.

Source: S&P Capital IQ.

As that graphic shows, when it comes to the median stock return, the higher-dividend group beats the low or no dividend group through every period, bull and bear alike. And at the same time, in both bull and bear markets, dividend stocks are more likely to deliver positive returns for investors.

Add that all up and we once again confirm why dividend stocks are the choice for investors looking for reliable, consistent returns.

The long road to dividend greatness
Many investors swearing by dividend stocks right now will inevitably get lured into other areas of the market. Sadly, many will likely be lured to the flavor of the week just before the next market turn and will end up making that cringe-inducing mistake of buying high and selling low.

But you don't have to be part of that group. Figure out why you're investing in dividend stocks. Focus on the longer time frames over which dividend stocks tend to excel. And rather than just thinking about it today, write it down somewhere so you can refer back to the "whys" of what you're doing when you're tempted to chase recent hot stocks.

Where to invest specifically? For investors who want a good one-stop shop for dividends, there's the great Vanguard Dividend Appreciation ETF (NYSE: VIG  ) . For individual stocks, I've named a couple above, but you can get a basketful of additional ideas from The Motley Fool's special report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." You can grab a free copy by clicking here.

The Motley Fool owns shares of Buffalo Wild Wings. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and Buffalo Wild Wings. Motley Fool newsletter services have recommended writing covered calls in Buffalo Wild Wings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Vanguard Dividend Appreciation ETF, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (33) | Recommend This Article (71)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2012, at 9:17 PM, neamakri wrote:

    I invest in only dividend stocks. Yesterday (NYB) paid me 25 cents per share. I get to keep the shares too; no need to sell shares to claim my reward. NYB has paid well for over 16 years.

    I have tried to buy & sell to make a profit. Have had +/- successes. I feel that figuring on stocks to go up is like gambling in Las Vegas, whereas dividends can keep on coming.

    My latest purchase is (PDLI). The dividend ex-date is 3/5/2012. Will purchase a few more shares on Monday.

  • Report this Comment On February 20, 2012, at 11:27 AM, JGBFool wrote:

    Good article. Chasing returns based on recent performance is frequently a poor strategy. Holding a decent amount of solid dividend-payers in the portfolio over the long term will pay off well in most cases.

    The iShares DVY is another good consideration for a dividend ETF.

  • Report this Comment On February 20, 2012, at 4:41 PM, rel77 wrote:

    While I appreciate his point, I'm an investor who is somewhat leery of companies with "blow out profits". I prefer planes to rocket ships - a nice gradual ascent and descent, not a stock on steroids that shoots through the stratosphere and then plummets back to earth. But that's me. But I do like chicken wings....

  • Report this Comment On February 20, 2012, at 4:44 PM, trader350 wrote:

    I am confused about the charts. The first chart of 03-08 shows the higher div stocks losing, the second chart of better quality stocks shows them winning?

    I am going to keep on buying my dividend stocks until Jim Royal says not to =D

  • Report this Comment On February 20, 2012, at 4:51 PM, mikecart1 wrote:

    Dividends over no dividends. Math is powerful. It is obvious many never passed the class though.

    :o)

  • Report this Comment On February 20, 2012, at 5:01 PM, wolfhounds wrote:

    Too simplistic. I've been an investor for 30 years. My substantial IRA and ROTH accounts are invested only in blue chip dividend stocks which compounded (ala Buffet) have destroyed the market all these years. While I own stocks like AAPL and ISRG in my taxable account, I also like to keep a floor in case of downturns with stocks like WSO. No one strategy will keep a long term investor safe, but trying to change strategies when markets change is flirting with disaster. Timing is timing, no matter how you dress it up.

  • Report this Comment On February 20, 2012, at 5:03 PM, durango58 wrote:

    Not quite correct there. My largest holding is KMP. I get yield, growth and tax advantages. You CAN get yield and growth. And the tax advantage is a bonus. Just takes a lot of research.

  • Report this Comment On February 20, 2012, at 5:06 PM, Regarded49 wrote:

    is this article a joke or serious?

    Dividend reinvesting over time with a diversified portfolio, in blue chip stocks is the most secure and least risky way to invest in equities and to build wealth. Will someone please tell MF to review what their bloggers write.

    I give up with MF

  • Report this Comment On February 20, 2012, at 5:11 PM, TMFKopp wrote:

    @AlanLee49

    "is this article a joke or serious?"

    Perhaps if you read the article it will all make more sense.

    Fool on!

    Matt

  • Report this Comment On February 20, 2012, at 5:12 PM, wdanielson wrote:

    And where will Wild Buffalo Wings (buffalos have wings? and are they not Bison?) be in 20 years? I suspect ZERO. Sounds faddish to me or at least higher risk than say, boring old P&G or UTX. In the last 3 years I've set up an account solely for investing in Dividend stocks (with total DRIP) -- and it's been the best thing I've ever done (next to getting in on QSII and Netflix and Apple early on). I think there's a place for Buffalos with Wings.... but for peace of mind, I'm grateful I've started with dividend stocks.

  • Report this Comment On February 20, 2012, at 6:10 PM, ebabes wrote:

    Dividend stocks with DRIPs are the way to go. E.G. I bought KMP in 08, already returned my initial cost. Dividends are great BUT you also have to buy in at a good price, not just because there is a nice dividend.

  • Report this Comment On February 20, 2012, at 7:09 PM, NJ7 wrote:

    In the end, no (human) investor can time a bull market perfectly. As Jeremy Siegel showed, the hot stocks (which a non-dividend paying, growth stock is almost always going to fall under), underperform the tried and true companies because it is rare to pick one up at a reasonable valuation. I mix both dividends and growth stocks in my portfolio, but those growth stocks are almost always under P/E 10 (Cirrus Logic, Diana Shipping) or at an extreme for a profitable company, P/E 13 (Nvidia). So I would say that selected growth stocks will work in any market, but trying to time in and out with growth stocks is a recipe for small returns or worse. One question, did you reinvest dividends for those statistics?

  • Report this Comment On February 20, 2012, at 7:27 PM, KaiUli wrote:

    Redo your charts to compare stocks that pay no dividends vs stocks paying dividends. It looks like you're stealing < 2% dividend payers to pad your stats.

  • Report this Comment On February 20, 2012, at 8:42 PM, jimskura wrote:

    i have moved more and more to dividend stocks

    if companies are not prepared to pay a reasonable amount for the use of my money then i would prefer to put it where it is appreciated. if a company cAN'T OR WON'T PAY DIVIDENDS then maybe investors should penalize them for this.

    dividends have dropped to a very low point. i am investing not giving my money away to a company for their use.buying a new ipo with no dividends [ face book ] is a recipie for disaster. if you buy it then you need to find some one willing to pay even more for a stock that pays no return.

  • Report this Comment On February 20, 2012, at 10:23 PM, alvidovich wrote:

    "Attention Dividend Investors: You Will Miss Out"

    I've got bad news for you, dividend investors. You're losing. And as long as the bull market continues, you're going to continue to lose.

    1. WHY USE THIS MISLEADING TITLE FOR THE ARTICLE?

    2. "as long as the bull market continues" YOU DON'T KNOW HOW LONG THIS BULL MARKET WILL CONTINUE.

    3. THEN YOU GO ON, IN THE ARTICLE, TO TAKE THE OPPOSITE POSITION.

    I DON'T GET IT!!

    AL

  • Report this Comment On February 20, 2012, at 11:22 PM, Chontichajim wrote:

    All this proves is the weakness of "average" compared to "median". The average is overly influenced by a small percentage of great performers while the median is more likely what you will end up with if you pick non-dividend stocks over dividend stocks without exceptional luck.

    I keep about 10-20% low or non-dividend growth stocks, but otherwise all 2% or better dividend payers. I like the growth stocks, but to make any money you must sell them so not only are you trying to pick stocks well above median, you are trying to pick the best time to sell. Overall it is better to take a good dividend and not worry that you won't always stay ahead of S&P.

  • Report this Comment On February 20, 2012, at 11:25 PM, bebop111 wrote:

    I agree completely with Al, above. This was the wrong title and poor writing for a discussion of the double-sided coin of "dividend-investing." The tease and then the double-axel flip midway through were neither clever nor illuminating, just weak writing.

  • Report this Comment On February 20, 2012, at 11:37 PM, optimist911 wrote:

    By this article's logic, penny stocks and other high-risk issues are far better than the ho-hum non-dividend stocks proposed here. 17% up in one day? Try 170% or possibly way more with penny stocks. Still, whether it be 17% or 170%, I'd love to know the day to buy and the day to sell -- especially since what goes up big usually comes down big as the dumpers step in.

  • Report this Comment On February 21, 2012, at 6:24 AM, kalimon789123 wrote:

    Whew, I thought I was nuts reading this article featuring very selective time frames picked AFTER they did well, now I see the comments-

    -I'm just "foolish"

    Thank goodness.

    Guess an article has to come out everyday

  • Report this Comment On February 21, 2012, at 11:51 AM, Classof1964 wrote:

    Two additional points might be made about dividend paying stocks: 1) For a buy&hold investor like myself, my yield from dividends in companies that regularly increase their dividends over time rises with those increases and can become quite rewarding. 2) Seigel makes the point that the returns on equities from 1926 often quoted assume reinvested dividends. Without such, returns on equities are seriously less.

  • Report this Comment On February 21, 2012, at 1:55 PM, TMFKopp wrote:

    Wow folks! I'm really taken aback by the comments here. Obviously this missed the mark for quite a few of you.

    Here's the breakdown to hopefully help out...

    The first chart shows a pretty simple fact: During bull markets, higher-paying dividend stocks tend to underperform those stocks that pay little or no dividend. If you think about it, it makes perfect sense because growth stocks have the wind at their back during cyclical expansions and as investors feel more confident about the economy, they're willing to stray from the perceived safety of dividend stocks.

    HOWEVER, as the second chart and the conclusion of the article point out, by stepping back and looking at the longer term, dividend stocks tend to perform better through all types of markets. In both bull and bear markets, the *median* higher dividend payer outperforms and you're more likely to have a positive return from a higher-paying dividend stock.

    The reason that that's important is that as this bull market stretches on, the growth stocks that are outperforming will be increasingly tempting to investors. Yes, as the comments above suggest, right now there are plenty of investors that will defend dividend stocks to the death, but that will inevitably start to change.

    The bottom line is that if you're an investor that wants solid, relatively consistent, long-term returns, dividend stocks are the way to go. But you have to be aware that you *will* feel like you're missing out over the short term and be ready to not give in to that sirens' song.

    Hopefully that helps out!

    Matt

  • Report this Comment On February 21, 2012, at 2:08 PM, TMFKopp wrote:

    @KaiUli

    "Redo your charts to compare stocks that pay no dividends vs stocks paying dividends. It looks like you're stealing < 2% dividend payers to pad your stats."

    Generally, a "please" can work wonders with a comment like this. But maybe I'm just weird like that...

    Anyway, believe it or not, there was method to my madness as far as that split. If we look back to 1995, Southwest Airlines had a 0.23% yield. Is that really a dividend-paying stock? Technically yes, but I don't think any self-respecting dividend investor would get excited about a yield like that. Similar were Morgan Stanley (0.22%), First Data (0.25%), and Cracker Barrel (0.11%).

    So, somewhere you have to have a cutoff of what makes a "legit" dividend. Is it 1%? Maybe, but I chose 2%, a level at which most dividend investors are likely to start taking notice.

    BUT, just because you asked so nicely, I reran the data for 1995-2000. By splitting the data into stocks that paid any dividend at all and those that paid nothing, the results skew even more in favor of those that paid nothing.

    Average returns

    No dividends: 175%

    Dividends: 123%

    Matt

  • Report this Comment On February 21, 2012, at 3:21 PM, mikecart1 wrote:

    This article still makes zero sense. It is obvious there are stocks every year that have no dividend that will multiply several times and this will artificially inflate a data grouping that you select to try to highlight a theory or point. This is statistical analysis 101. You could even create an article that says those that pay you dividends are stealing your money by adding inflation, taxes, etc. within a certain group of stocks and time periods.

    Bottom line: a person that wants to build wealth - key word - would acquire this far faster and with much less risk by investing in stocks with dividends that grow over time. This is so basic that arguing with it is just ridiculous.

    ⓂⒾⓀⒺⒸⒶⓇⓉ❶

  • Report this Comment On February 21, 2012, at 4:58 PM, a2badger wrote:

    My late father, who worked in the securities business as a broker for 30+ years once gave me a paperback book entitled "Dividends don't Lie".

    For an investor with a long term perspective, investing in stocks with a dividend history has always made sense.

  • Report this Comment On February 22, 2012, at 12:25 PM, Guestimater wrote:

    Interesting article, but it does not explain why a div fund like Vanguard's VDIGX has done so well.

    Success of a company is more dependent on management's ability to "grow" in profitable areas than their dividends. One area to watch is a company's research budget. Some dividend stocks are just not going to grow much, like utilities.

    The downside potential for many high fliers is too often realized - Netflix, Amazon,... and an investor has to watch carefully or get stung pretty hard.

    Fundamentals, fundamentals, ...

  • Report this Comment On February 22, 2012, at 2:00 PM, jgneuw wrote:

    I don't get the point of Matt K's thesis. As a retiree who still works I am substantially invested in div stocks. And, intend to stay there until Obma gets re-elected by the ignoraNT fools who think they are punishing the "rich." His 49% hit on dividends will mean game over. It will actually be much greater than 49% when you consider corp tax hit.

    We are in for a bumpy ride!! Option trading may be the only way out. ----- JG

  • Report this Comment On February 22, 2012, at 2:11 PM, jgneuw wrote:

    I am wondering whether or not Wall Street is not behind this impending hit on dividends in order to give trading a boast. There will definitely be a mad scramble for value when this new tax rate takes effect. Volume will go thru the roof. ------ JG

  • Report this Comment On February 23, 2012, at 4:28 PM, snickerdoodle9 wrote:

    I am a retired long term ( not a stock market gambler or day trader ) investor with a diversified portfolio of companies who pay out high yield dividends / corporate bonds and blue chip companies each who pay dividends once every 6 months . Because I won't need the income for another 7 years when I will be required to start taking distributions from my portfolio ; I reinvest dividends . As long as I leave my portfolio alone and am seeing a return on the money that I am making I am not losing money or sleep .

  • Report this Comment On February 23, 2012, at 4:51 PM, DJDynamicNC wrote:

    "Buffalo Wild Wings" is just the 2012 way of saying "Krispy Kreme Doughnuts." ;)

    Besides, no self-respecting Buffalonian would be caught dead eating chicken wings at any joint that calls them Buffalo wings. Buffaloes don't HAVE wings.

    Anyway, good article as always. Buying shares and hoping to sell at a higher price is gambling. You can do a lot to give yourself an edge when gambling, but it's still gambling.

    Buying shares and collecting a portion of a company's profits, on the other hand... now that's investing.

  • Report this Comment On February 23, 2012, at 4:56 PM, DJDynamicNC wrote:

    "a person that wants to build wealth - key word - would acquire this far faster and with much less risk by investing in stocks with dividends that grow over time. This is so basic that arguing with it is just ridiculous"

    It seems pretty clear that the author is not arguing with that thesis at all, and is in fact bolstering it.

    In fact it seems like a lot of commenters missed that.

    Be sure to read the article all the way through to the end, where it concludes with:

    "Many investors swearing by dividend stocks right now will inevitably get lured into other areas of the market. Sadly, many will likely be lured to the flavor of the week just before the next market turn and will end up making that cringe-inducing mistake of buying high and selling low.

    But you don't have to be part of that group."

    That's exactly the conclusion you drew.

  • Report this Comment On February 24, 2012, at 11:23 AM, JGDTexas wrote:

    Am I going to chase that additional 6% and take on more volatility? It seems as though the Wall Street culture punishes stock of good solid companies but praises and rewards companies only if they are constantly expanding at some rate Wall Street deems appropriate. What's wrong with a well run solid company that continues to pay dividends? Sometimes I even think it wolud be entertaining to watch these wall Street Analysts take their own money and try to run a company according to the "rules" they impose on real companies through their analysis. Sometimes i even muse that, those that can, run companies; those that can',t talk about what others should be doing. Not attacking whoever wrote this article, just rambling.....anybody that's mad, just save your powder.

  • Report this Comment On February 24, 2012, at 1:16 PM, WmHilger1 wrote:

    I have been a dividend investor all of my life and am presently getting 9.847% dividends on my cost of investments. Back in the days when 6% was hard to get, I also averaged about 6%. All that I can say is do the mat!. A 3% average dividend compounded over 50 years equals 4.3839. A 6% dividend over the same time period equals 18,420. A 10% dividend equals 117.391.

    I don't chase growth although I frequently also get some price appreciation on my invesments. However, since I am a firm believer in the power of compound interest (just like Albert Einstein), I realy enjoy sitting back and letting my money work for me!

  • Report this Comment On February 24, 2012, at 1:21 PM, WmHilger1 wrote:

    Sorry for the typos That should be "do the math!", and the 6% compounding should be 18.420.

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