Those who select dividend-paying stocks in this way could be out of luck – 09/03/2023 – From Grain to Grain

You’ve probably seen disclosures on social media like: find out the 10 stocks that paid the most dividends in the last year. It’s tempting to know who these were and it gives you that heartache for not having bought it sooner. So, many think: calm down, I can buy now and take advantage of it. However, does this strategy work?

It is not news to anyone that past returns are no guarantee of future returns.

However, it is common to believe that if a company was a good dividend payer in the past, it should continue with the same behavior in the future.

This is not necessarily true.

To break this myth, I did two simulations with 62 Ibovespa companies that existed in the last 10 years.

Before presenting the simulations, I will explain a concept about stock profitability to level knowledge.

The total return on a stock is made up of two parts: the capital gain and the dividend gain. The capital gain comes from the appreciation of the shares. The gain or return on dividends is the return obtained from the payment of proceeds.

We are only going to address here the return on earnings such as dividends, Interest on Equity (JCP) and others.

In both simulations, we want to understand whether the stocks that had the best dividend yield in the last 5 and 3 years remained among the first in the following 5 and 3 years

For this, in the first simulation, I identified the 10 stocks that had the highest return on dividends in the last five years ending in August 2018. Then, I looked at the position of these stocks up to the present moment, that is, five years later .

Best payers 5 years before 2018	Position in the 5 years following 2018
Taesa	4
Cemig	12
Alive	8
Eletrobras	21
Bank of Brazil	11
Eletrobras	39
Engie Brasil	17
Bradespar	1
Itausa	18
Equatorial	46

The 10 stocks that had the best dividend return in this first simulation and their position five years later are shown in the table above. Remember that there are only 62 companies in the sample.

Note in the table that only three shares, Taesa, Vivo and Bradespar, among the top ten payers continued to be among the top ten payers five years later.

In the second simulation, I did the same test, but with the 10 stocks that exhibited the best dividend return in the 3 years prior to August 2020. Then, I evaluated the position of these stocks in the following three years that ended now.

Top payers 3 years before 2020	Position in the 3 years following 2020
Taesa	7
Alive	16
Itausa	28
Cemig	12
Engie Brazil	17
Santander BR	18
eztec	44
ItauUnibanco	34
Bank of Brazil	13
Bradespar	1

In the table above, I present the 10 stocks that exhibited the best dividend yield through 2020 and their position in the three years following 2020.

In this case, only two stocks were among the top 10 payers in the following period, Bradespar and Taesa.

Remember, the economy is dynamic and the results and dividend distribution of companies change with factors such as competition, technological changes, investment needs and others.

The companies that presented the best performance and were able to distribute more results in the past, not necessarily, will be those that will repeat the same feat in the future. Therefore, be careful when using this strategy to select your investments.

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

Talk directly to me via email.

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