Investors Too Focused On Dividends

Despite the fact that financial theory has long held that dividend policy should be irrelevant to stock returns, one of the biggest trends in recent years has been individual investors rushing to buy dividend-paying stocks.

In some cases, it’s a substitute for safer, but lower-yielding bonds. In others, it’s because investors believe dividend-paying stocks are simply better investments. For example, the SPDR S&P Dividend ETF (SDY | A-71) now has $12.4 billion in assets under management, and the Vanguard High Dividend Yield ETF (VYM | A-94) has grown to about $8.6 billion.

With this recent popularity in mind, I thought it would be interesting to examine the difference in returns on the stocks within the S&P 500 that pay dividends and the ones that don’t.

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