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A 'Steady-Eddie' Dividend Strategy By Spencer Jakab

When the President of the United States compares the economy to a "rocket ship" and tells you to "go out and buy stocks now," you do it. The question is what's next, and when. The booster stage fizzled about four hours after his Thursday morning social-media post, and futures are mixed, with all eyes on this weekend's trade talks with China .

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It's one of the most successful investing strategies. You can do better.

Dozens of funds have been launched in the belief that companies that steadily increase their dividends over time have been by far the best market performers.

The dividend growth tail sometimes wags the dog: The S&P 500 Dividend Aristocrats, for example, includes the 69 companies that have raised payouts for at least 25 years. When management teams decide they can't up them by even a penny-Pfizer, General Electric, AT&T and Walgreens all lost the crown-they've been punished. Exxon Mobil tied itself in knots to keep the distinction, doing so by a whisker .

Dividends have become less important to overall returns, but they're hardly extinct. Ed Clissold of Ned Davis Research points out that more than four-fifths of companies in the S&P 500 pay one and that 324 either grew or initiated them in the past year.

Though not intentionally, it was some research years ago from his firm that stoked dividend-growth mania. Using an older technique for calculating returns that has been widely reproduced, it showed stellar results specifically for that type of stock.

The research outfit's "added methodologies to reflect changes in the industry" show that it's even more profitable to just focus on dividend yield. The top half of yielders have beaten growers in both bull and bear markets since 1973.

Be careful, though: A do-it-yourself method that worked until it didn't was the "Dogs of the Dow," popularized in a 1991 book by Michael O'Higgins, "Beating the Dow." It recommended buying the top 10 dividend-yielders in the 30-stock index each year.

Consider a twist: Bank of America strategist Savita Subramanian was asked recently whether she had some simple techniques. She said dividing large capitalization, dividend-paying stocks into five buckets by yield is the first step. Avoid the top group, though, because those really could be dogs-sort of like Walgreens before its meltdown . Instead, buy the second quintile.

So it's just like the steady-Eddie strategy that anybody can run...you can get this data off the Internet for free. You can run it yourself every month, and it's just been, like, a really kind of an interesting, very, very boring unsexy strategy that seems to work in most market environments.

How well? Using information from Hartford Funds , a $1,000 investment in the S&P 500 or its predecessor made in 1930 would have grown into $8.6 million through last year. The second quintile of dividend yielders would have grown to $31 million.

Can you do even better? Maybe, because dividends are overrated. Including stock buybacks and net-debt reduction has had even better results.

One company that hasn't paid a dividend in decades? Berkshire Hathaway. It'll never be an aristocrat, but that seems to have worked out just fine.

Stocks I'm Watching

TSMC : The Taiwanese chip maker's revenue surged in April, according to an update from the company . The shares rose in local trading.

Pinterest : The social-media company swung to a profit and guided for higher-than-expected revenue this quarter. That helped soothe concerns that trade policy would hurt spending on digital advertising. Shares jumped 12% in premarket trading.

Expedia : The online travel agency reported a larger quarterly net loss, hit by weaker-than-expected travel demand to and from the U.S. Expedia shares dropped 9.5% ahead of the bell.

Coinbase : The biggest U.S. cryptocurrency exchange posted a sharp drop in quarterly profit , knocking its shares premarket. The stock jumped in Thursday's session, boosted by a rally in bitcoin prices and a deal to buy Deribit .

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About Me

My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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May 09, 2025 06:24 ET (10:24 GMT)

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