Dividend-paying companies were one of the worst investments in stocks in the last decade – 05/12/2023

When we think of investments in stocks, one of the first interests that arise is to live on income by receiving dividends. Many dream of receiving a “salary” without doing anything. This yearning brings the perception that stocks that pay dividends are the best investments.

This week, this interest increased even more with the announcement of a large dividend payment by Petrobras. However, was investing in dividend-paying companies the best stock investment decision?

The MSCI index construction company segregates companies according to their financial characteristics and presents the past results of each of these segregations on its website.

On the MSCI website, companies are divided into six factors: growth, value, dividends, momentum, minimal volatility, and quality. The MSCI groups stocks that have characteristics in common and forms an index for each of these characteristics or factors.

In addition to separating these factors, it also presents two other groupings for stocks, one based on equal weighting and the other based on market value.

In the disclosure material for each of these factors, we find the criteria used to segregate companies according to these characteristics.

For example, to form the index that constitutes the dividend factor, it considers the companies that pay the highest dividends and also considers whether these dividends are sustainable and persistent.

Could stocks in companies with high dividends, sustainable and persistent, be able to result in better returns in the long term?

The figure above shows the return for the indexes formed by companies from 46 developed and emerging countries.

It is important to point out that the return consists of both the capital gain and the return on dividends.

The result shows that the dividend index was one of the worst stock investments among all factors over the 10-year period. Just won from you to simply buy all equally weighted stocks and value stocks.

All other factors had better results.

Even with the recent crisis we experienced in the stock market, also in the short term, that is, in 12 months, the index that aggregates dividend-paying companies was the worst. Dividend investment lost even if you don’t make any selection and just split across all shares equally.

Realize that the common factor or characteristic in the companies that produced the best result and more consistently was the quality factor.

Everyone agrees that the stock market is a risky investment, but with potential for long-term appreciation. However, contrary to popular belief, you are not necessarily better off in this market by investing in dividend-paying companies.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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