Dividends aren’t as important as they might appear. True, dividend payments can impose discipline on managers, making it harder for them to squander shareholders’ money on low-return pet projects. And yes, high-stocks have outpaced their lower-yielding counterparts over the long term, as shown in Exhibit 1. But there does not appear to be a causal relationship between dividends and returns.
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Instead, this performance pattern can be explained by high dividend payers’ tendency to trade at lower valuations and exhibit less sensitivity to the business cycle than less-generous dividend payers. These characteristics have historically been associated with more-attractive performance independent of dividend policy. So dividends don’t tell the whole story. Focusing too narrowly on them can lead to trouble.
