Only one of the four shares of large Brazilian banks beats the CDI in more than five years – 04/12/2024 – From Grão to Grão

When we talk about living off income from dividends and dividend-paying stocks, the names of large Brazilian banks immediately come to mind. The four largest national banks gained fame for the frequency and amount of dividends paid. However, in the last five years, they have lived only on fame, because the return that is good, the shareholders are not seeing.

Dividend-paying companies are usually those from mature sectors without major growth opportunities. The maturity of the company provides cash generation. The lack of investment opportunities allows this cash to be allocated to shareholders instead of future growth. Therefore, the dividends of these companies are higher.

Sectors that fit these characteristics are public concession sectors, such as electricity, sanitation and highways, but also the banking sector.

Everyone knows that bank profits are high. That’s not news. With a high profit and the lack of need for its use, it is converted into dividends, share buybacks and other shareholder benefits.

A point that many initial investors do not understand and only discover after a certain time is that whenever a stock distributes a dividend, its price is adjusted. This means that the share price falls by the same amount as the dividend paid.

For example, consider a share that has a value of R$30 and declares a dividend worth R$1. The next day, or more precisely, the day after the “ex-dividend” date, your share dawns at a price of R$ $29 and you have R$1 cash in hand.

Therefore, an investor’s wealth does not increase by simply paying the dividend. This is a myth that many delude themselves.

The wealth of the individual who invests in dividend-paying shares only increases if the share rises and recovers the value of the dividend adjustment.

Therefore, it is an illusion to buy a stock just because of the dividends. You can often earn more and take less risk just by investing in a fixed income.

This is precisely what has happened with three of the four large Brazilian banks.

Among the four banks below, which do you think was the only one that beat the CDI when considering the return on capital gains and dividends?
a) Banco Bradesco
b) Banco do Brasil
c) Banco Itaú Unibanco
d) Banco Santander

The following table only presents the dividend rate received by investors from each bank and the return provided by the CDI. The dividend rate, or dividend return, is calculated by dividing the dividend per share received by the price of each respective share.

Dividend return	2019	2020	2021	2022	2023
Bradesco	6.2%	2.1%	4.1%	2.4%	11.2%
Brazil	5.5%	2.8%	5.8%	14.4%	13.2%
Itau Unibanco	7.9%	3.5%	3.5%	4.9%	5.0%
Santander BR	4.9%	5.7%	6.7%	7.5%	5.9%
CDI	6.0%	2.8%	4.4%	12.4%	13.0%

Normally, this table is shown as a great advantage of investing in these banks, as in dividends alone the investor could, in many cases, receive more than the CDI return.

However, this table is misleading and many only understand the illusion later.

As I said previously, we cannot only consider the return on dividends. It is also necessary to consider the capital gain, that is, the variation in the share price.

Some fools repeat the phrase “only the dividend matters”, but this is not true.

The correct answer is “only the total return matters”.

The total return is made up of all the gains that a shareholder can have from their investment in the share, for example: dividends, bonuses, price changes, repurchases, and others.

After all, what’s the point of receiving money from one pocket if the money comes from the other pocket?

And this is what has happened with some Brazilian banks.

In two of the four banks, the investor who invested at the end of 2018 today has less than he invested. Only one of the banks has achieved a return greater than the CDI since 2018, as of today (12/04).

Total returns	Since 2018	2019	2020	2021	2022	2023	2024
Bradesco	-23.6%	18.9%	-15.2%	-18.7%	-11.3%	25.7%	-16.4%
Brazil	83.0%	19.6%	-23.6%	-19.9%	34.9%	76.2%	5.1%
Itau Unibanco	46.9%	12.9%	-11.2%	-16.8%	24.2%	42.3%	-0.4%
Santander BR	-8.8%	21.3%	-3.2%	-25.5%	0.8%	21.7%	-15.1%
CDI	48.8%	6.0%	2.8%	4.4%	12.4%	13.0%	3.0%

The table above shows the total return of the four banks since 2018 and the CDI return.

Note that only Banco do Brasil has had a return since 2018 greater than the CDI, when considering the gain in dividends and the appreciation of shares. In other words, Banco do Brasil’s total return was worth it. However, the same cannot be said for others.

Anyone who invested in Bradesco and Santander shares at the end of 2018 currently has less than the initial amount invested. That’s right. If you invested R$100 thousand in Bradesco, even considering the dividends received and reinvesting them in the share itself, it would have a value today of just R$76.4 thousand.

Beware of myths of the past. The corporate world is very dynamic. A sector that did very well in the past may behave completely differently in the future.

In the case of banks, behavior changed due to the strong entry of new competitors.

New banks such as Nubank, XP, BTG and others are coming in heavily and reducing profit margins to win over customers from traditional banks. This is a movement that destroys the value of old banks. These have greater difficulty competing, because if they adjust the prices of their services so as not to lose customers, they lose returns, in addition to customers.

When reflecting on investing in dividend-paying shares, always consider the asset’s price appreciation capacity. After all, what makes wealth grow is total return and not the flow of payments received.

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

Speak directly to me via email.

Follow and like De Grão em Grão on social media. Follow investment lessons on Instagram.