Apr 10, 2022·edited Apr 10, 2022Liked by Market Sentiment

The returns from the first study assume the individual reinvested the dividends correct?

Did they do any analysis on how it performs post an average tax rate? Meaning after paying ordinary income tax on dividends this is how returns really look.

Also did they examine potential bias for low performers in the non dividend paying group?

For example, not every company that avoids paying a dividend is a growth stock. It could mean they are in decline. If comparing high growth companies to mature dividend paying companies are the results still the same? Or do all good high growth companies eventually become dividend paying ones in the end leading to survivorship bias?

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Very very good catch. They did not consider taxes while reinvesting! This is going to significantly affect the overall return - I am guessing they did not consider taxes since the tax bracket can be very different based on your current income. But still, I think it's a pretty big miss from their side.

"Ned Davis Research conducted a study in which they divided companies into two groups based on whether or not they paid a dividend during the previous 12 months."

I think they just split the companies based on the past 12 month trend.

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The Hartford research only looked at whether companies paid dividends over the last year and whether there was an increase or a decrease. That can be a bit tautological because companies that had a good year are likely to pay out a bigger dividend. It's like saying, "the most successful companies were the most successful."

Perhaps a more informative study would examine a real growth index fund vs a real dividend index fund over a long period of time.

I found a Vanguard dividend fund, VYM. On the 'performance' page linked below it is possible to compare its growth to other indexes and funds on a line graph. I put it up against VBK (small cap growth ETF) and the S&P over ten years. S&P came first, the other two about equal second.


I chose those funds at random - perhaps someone can find one that did better.

Like Mulder, I want to believe. Like Scully, I cannot ignore the evidence that the broad index keeps on winning.

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Hi Nikolai,

Your first argument is not that strong since it can be replicated by anyone.

"Ned Davis Research conducted a study in which they divided companies into two groups based on whether or not they paid a dividend during the previous 12 months."

So, if I have to replicate this strategy today, I can just look for companies that have increased/decreased their dividends over the last 12 months.

I had also checked the dividend growth vs index fund over the past 2 decades and there did not seem to be an outperformance - Possibly because it needs a longer time frame and the last decade was heavily dominated by tech/growth stocks.

But another reader had commented something much more concerning - The study did not consider taxes while reinvesting their dividends which is a big miss. So I do think index fund is going to come out on top.

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