4. The Value Dividend Study

When I first sat down and began researching which impact dividends have for value investors, I expected to find a clear answer by looking at the research. However, this was no the case.

As the previous overview shows, value investing and dividend policies have been subject to extensive research during the last decades – looking back as much as sixty years. However, very seldom have researchers looked at dividends and value investing together.

Today, there is no single recommendation for the value investor whether he should prefer dividend paying over non-dividend paying value stocks.

The main question I asked myself was:

Do value stock portfolios which pay significant dividends have a higher overall return on invested capital than value stocks which do not pay dividends?

I wanted to find a clear answer. This is why I decided to do the research myself and occupy the finance lab of my university for several weeks.

Implications from the Theory

Before we look at the data, let us summarize which implications the theoretical research we’ve covered so far should have for the value investor.

Efficient Dividends

According to the efficient market hypothesis, it is not possible to create above-average returns by holding a specific portfolio. For the value investor this would mean that he can neither outperform the market with a value strategy, nor with a dividend strategy of value stocks.

According to the efficient market hypothesis, all portfolios should show similar performances as the index. No investment strategy – whether it is a value-, a dividend-, or a value-dividend-strategy – can outperform the index.

Holding Period

When it comes to the ideal holding period, research suggests1 say that value portfolios will usually outperform the index when the holding period is three to five years. The researchers Rousseau and Van Rensburg2 say that the longer the holding period is, the higher and more reliable are the value premiums for the investor. 

This would mean, if value portfolios are held on average for holding periods of 3-5 years or ideally longer, the value portfolios should outperform the index.

Dividend Premium

Some solid research suggests that dividend-paying stocks outperform non-dividend paying portfolios. Research by Vanguard indicates that stocks which pay a dividend show higher returns and have less volatility than the index itself.

When we combine this with the decisive research on the value premium, a portfolio consisting of dividend-paying value stocks should outperform both, the index and the value portfolio itself.

No-Dividend Premium

Instead of paying out dividends, great companies can use dividend cuts or suspensions as a cheap source of capital. Companies could then use this capital to finance profitable projects.

Companies who pay no dividends or only a nominal small dividend might want to indicate to investors that they have profitable investment opportunities at hand. 

In general, stocks which do not pay dividends are usually companies which invest in promising projects today, which is why these companies might turn out to be more profitable in the future and thus outperform the market long term.

This suggests that companies who pay no dividends might invest their excess cash into profitable long-term projects, and thus non-dividend paying stocks outperform the index in the long term, as soon as their investments turn profitable.

Dividend Mediocrity

Then there are companies who pay a small but seemingly satisfactory dividend. These businesses may be reluctant to cut or suspend it, even though the financial situation of the company might require it.

As a result – the mere existence of mediocre dividends cannot indicate how well a stock will outperform non-dividend paying stocks. These companies who pay and stick to their dividends might forgo profitable investment opportunities by doing so.

As a result, value stocks which pay an average dividend will underperform companies who do pay a high dividend or no dividend at all.

Finding Answers

So, in theory, the research is suggesting that dividends might be an important factor for the returns of the value investor.

But I wondered: Do all these hypotheses hold true when we look at the real world data? And what role do dividends play when the market crashes?

My goal was to answer these unanswered questions by doing an extensive and hopefully useful study out of deep personal interest. Writing a bachelor thesis meant dedicating months of my life. I wanted to avoid writing just another thesis. I wanted to immerse myself into a topic to hopefully find something which is unique and of value to people in real life – not academia.

For me, a successful thesis meant giving investors in the real world a useful hint on how they can apply a value-dividend investment strategy to improve their returns – not in theory, but in real life.

To find answers to my questions, I spent many early mornings and late evenings in the finance lab of my university, crunching numbers through Thomsen Reuters Eikon and Microsoft Excel.

With this book, I present you my research in an accessible and hopefully useful format. To be upfront: I am in no position to give investment advice.

All I want to achieve with this book is that investors – whether large or small – understand the implications of the results and give them the possibility to implement the newly gained insights into their investment strategy. I also want researchers to pick up on this idea and dive deeper into the gripping topic of value dividends.

Study Design

I wanted to write a thesis which – in the end – is practical for the real-life investor. To accomplish this, I wanted to analyze as many stocks from the U.S. and European stock markets as possible. Before we look at the data I want you to understand how the study was designed.

Index Selection

I worked with data from the S&P 500 and the STOXX 600 index as the best possible representation of the entire U.S. and European stock market.

The S&P 500 is likely the world’s best known stock market index with a market capitalization of around 35 Trillion U.S. dollars and an estimated 13.5 Trillion U.S. dollars indexed or benchmarked to the index. It covers the five hundred largest U.S. stock-listed companies, which together account for around 80% of the U.S. stock market capitalization.

The STOXX Europe 600 can be viewed as the European equivalent of the S&P 500. It is a European index which represents the 600 companies with the largest market capitalization across 17 European countries, not limited to the European Union nor the Eurozone. With a market capitalization of 11 trillion Euros, it covers approximately 90% of the European stock market capitalization and is hence a good representation of the European stock market overall.

Study Period

The study examined a total of 1,100 publicly traded companies based in the United States and Europe over an 11-year period. The observation period began on January 1st 2006 and ended on December 31st 2016. 

This study period includes the global financial crisis from 2007 until 2008 and the European debt crisis from 2010 including subsequent stock recoveries. Thus, the findings provide value investors with new insights into how they can improve their portfolios before, during, and after a financial crisis.

Portfolio Creation

With both indices as a basis, I created in total four portfolios per index – or eight portfolios in total.

  1. I defined the overall index as the first portfolio.
  2. Then I created an overall value portfolio. To do so, I used the price-to-book ratio, which is the most often used metric in finance and academia to distinguish between growth- and value stocks.
  3. Using the price-to-book ratio, I filtered and ranked all stocks within the index. The 30% of stocks with the lowest price-to-book-ratio were defined as value stocks and added to the overall value portfolio.
  4. I then went on to create two additional value portfolios, one which pays a significantly high dividend and one which pays no dividend at all. To accomplish this, I ordered all value stocks according to their dividend yield. This initially resulted in a list of value stocks that do not pay dividends. I referred to this portfolio as the ‘value non-dividend’ portfolio.
  5. To create a corresponding ‘significantly dividend paying’ portfolio, I looked at the count of all stocks in the ‘value non-dividend’ portfolio. I then added the same number of stocks – which showed the highest dividend yield – to a third portfolio called “value significant dividend” or for simplicity throughout this book often referred to as “value dividend”.

As a result, I focused my attention exclusively on companies that were either paying no dividends at all or were paying a significantly high dividend. All companies in the middle  – which means companies that only paid a moderate or just above zero dividend yield – were left out.

I ended up with four different portfolios for each year and each index:

  1. the index,
  2. overall value stocks,
  3. non-dividend paying value stocks, and
  4. significantly dividend paying value stocks.

For all 8 portfolios, I calculated the yearly returns and the compounded returns for all possible holding periods between 2006 and 2016, ranging from 1 to 11 years. This resulted in 66 holding periods with 264 portfolios per index, or a total of 528 portfolios.

To avoid a survival bias, every portfolio has been rebalanced on January 1st each year. Stocks, which were included in the portfolio on January 1st, stayed in the portfolio until December 31st, even though they might have left the index during the year.

In the end, I calculated the average performances, the returns, Sharpe ratios and the compounded average growth rate (CAGR) of all portfolios and of all periods, including their corresponding standard deviations. Let’s look at what I found.

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Index Performance

I used the S&P 500 and the STOXX 600 as a basis for my study. Thus, all the stocks we can find in any of the three value portfolios are themselves part of the overall S&P 500 or STOXX 600 index. With that in mind, let’s take a look at the overall performance of both indices.

Compounded Returns

The key observations:

  • Both indices were significantly affected by the financial crisis of 2008. The S&P 500 lost -39% and the STOXX 600 lost -44% in value.
  • The S&P 500 has recovered more quickly and has continued to outperform the STOXX 600 from 2009 on.
  • During the 2011 European debt crisis, the STOXX 600 lost -10%, while the S&P 500 merely stagnated.
  • Over the 11-year period, investors in the European STOXX 600 were negatively impacted by two financial crises. The S&P 500 experienced only one crisis that negatively impacted returns, plus two years of stagnating growth between 2011 and 2012.
  • Overall, the S&P 500 recovered faster and more significantly from both financial crises than the STOXX 600.
  • The STOXX 600 achieved a meager compounded gain of 30%. In contrast, the S&P 500 index closed with a compounded gain of 74%, which is 54 percentages points higher than its European counterpart.

Average Returns

By looking at the average overall returns of the STOXX 600 and S&P 500 index portfolios over holding periods between 1 and 11 years, we can see that the U.S. portfolio on average always outperformed the European index portfolio.

The key observations:

  • For holding periods between 5 and 11 years, the U.S. index performed on average twice as good as the European index.
  • During the entire 11-year period, the S&P 500 showed a compounded annual growth rate of 5.2% versus 2.4% of the STOXX 600. 
  • The average yearly return of holding periods between 1 and 11 years is 7.5% in the S&P 500, which is more than twice as big as the average yearly returns of the STOXX 600, with 3.5%. 

It is consequently fair to say that during the period of this study, investors were better off investing in the U.S. rather than the European stock market.

Value Premium

Let us take a closer look at how well value stocks performed in both indices.

Value Premium in the United States

  • In the S&P 500, the overall value portfolio has outperformed the index portfolio for 8 out of 11 years.
  • Only during the period of 2012-2014, the value portfolio underperformed the index portfolio by an average of -3.5%.
  • The value portfolio significantly outperformed the index in 2009, the year of recovery from the 2008 financial crisis.

Value Premium in Europe

  • A value premium is also evident in the STOXX 600, where the value portfolio outperformed the index in 7 out of 11 years.
  • In 2014 and 2015, they significantly underperformed the index with 14 and 10% respectively
  • Also in Europe, the out performance in 2009 sticks out.

Dividend Premium

The value premium was not as surprising to me, since this is what the literature review predicted. My work got interesting when I looked with more detail at the non-dividend paying value portfolios and the significant dividend paying value portfolios.

Dividend Premium in the United States

In the United Stats, we can clearly see that not only value stocks but especially value stocks which pay an extraordinary high dividend or no dividend at all outperformed the market by a significant amount.

The key observations:

  • Compounded over the 11-year holding period, both ‘dividend portfolios’ outperformed not only the index, but also the overall value portfolio.
  • On a yearly basis, the overall value portfolio and the non-dividend portfolio outperformed the S&P 500 equally often; 8 out of 11 years, or 73% of the time.
  • The significant dividend paying portfolio outperformed the index – on a yearly basis – in 9 out of 11 years, or 82% of the time.
  • Both dividend portfolios also outperformed the value portfolio itself in 7 out of 11 years, or 65% of the time.

The observations suggest that high dividends and a lack of dividends (no dividends) are an indication for a superior performance of value stocks.

Dividend Premium in Europe

Now, can we observe a similar situation in the STOXX 600 index? Not as clearly!

The key observations:

  • Compounded over the 11-year holding period, all three value portfolios outperformed the index, but – as the graph above shows – it is not that simple in Europe.
  • On a yearly basis:
    • The value portfolio outperformed the index in 7 out of 11 years.
    • The non-dividend paying value portfolio outperformed the index even more often with 9 out of 11 years.
    • However: the high dividend portfolio underperformed the index 6 out of 11 years (55% of the time). It also underperformed the value portfolio 7 out of 11 years (65% of the time).

Still, at the end of the 11-year holding period, all three value portfolios showed a higher overall return than the index. Especially, the non-dividend paying value portfolio clearly outperformed the three other portfolios.

Holding Periods

As we saw in the last chapter, looking only at one holding period (of eleven years), limits our ability to draw conclusions. 

Therefore, we will now look at the compounded and average yearly returns for every possible holding period from one to eleven years. 

In other words: we look at all returns an investor would’ve achieved by holding a certain portfolio for a certain number of years, while rebalancing the portfolio each year. 

Rebalancing means, that the investor, each year, sells his entire portfolio on December 31st, screens the stock market, filters, sorts, and creates updated portfolios in which he invests on January 1st. This way, he makes sure to sort out companies which do not fulfill the criteria anymore, and that he adds new companies, which now fulfill our criteria.

Side note: From a tax perspective, it apparently would make sense to first screen the market, on December 31st then only sell stocks which do not fulfill the criteria anymore, and on January 1st buy stocks which now fulfill the criteria. Leaving the remaining stocks untouched.

Holding Periods in the United States

By looking at the different holding periods independently, we can see why it is important to look at more than just one holding period. 

While over 11-years, the significant dividend paying portfolio of the S&P 500 showed the highest compounded returns, for all other holding periods – from 1 year to 10 years – the non-dividend paying value portfolio showed on average the highest returns. 

The average compounded returns of the significant dividend paying portfolio was higher than the returns of the overall value portfolio and the returns of the index portfolio in every single holding period. 

We can also observe that the longer you follow a significant or non dividend value strategy, the higher seems to be the premium you can achieve. Let’s look at some examples of holding periods between 7 and 10 years.

Holding Periods from 7 to 10 Years

If you invested for 7, 8, 9, or 10 years into an overall value portfolio, you achieved on average respectively 153%, 153%, 172%, or 184% higher returns than the index.

If we assume that you had refined your portfolio, and only invested in value stocks, which pay a noticeably high dividend, your average returns would respectively been 210%, 231%, 313%, and 358% higher than the index portfolio.

Even better, if you had invested only in value stocks which pay no dividends, you would on average have respective returns which are 279%, 306%, 383%, and 429% times higher than the index portfolio!

As we can see, the non-dividend paying value portfolio showed on average the highest compounded returns of all S&P 500 portfolios.

Risk and Returns

But does this mean we can blindly invest our cash into this portfolio? Or do these high returns also imply the highest risk?

The short answer is: yes. The non-dividend paying value portfolio also showed the highest variance, especially for holding periods of 5 to 8 years. The large variance seems to be the result of large losses and consecutively large returns during and after the two financial crises.

The non-dividend paying portfolio showed the highest losses during the financial crisis of 2008, but at the same time, the highest returns in the years after the crisis – outperforming all other portfolios significantly.

So, considering the risk involved, what is the best portfolio to invest in? One method to find out whether a portfolio is risk-adjusted still a good choice, is the Sharpe Ratio. It compares the returns of an investment to its risks. The Sharpe ratio gives us a little hint whether even despite a large variance, a portfolio is still a good pick.

For my study, I did not use a risk-free rate, but instead used the index returns as the basis.

What we see is that the significant dividend paying value portfolio is – risk-adjusted – the best investment choice for the value investor in the United States.

Risk-adjusted, the non-dividend paying value portfolio is almost as good an option as the overall value portfolio.

Holding Periods in Europe

The situation in the European stock market is slightly different. First, the average compounded returns of the STOXX 600 portfolios were – compared to the S&P 500 portfolios – significantly smaller.

In Europe, the non-dividend paying value portfolio showed on average for every single holding period the highest average compounded return.

Holding Periods from 7 to 10 Years

Again, let’s put it into perspective. With holding periods of 7, 8, 9, and 10 years, the STOXX 600 value portfolio showed on average respectively 184%, 217%, 317%, and 269% times higher compounded returns than the index portfolio.

The non-dividend paying portfolio showed respectively 333%, 404%, 380%, and 379% higher compounded returns than the index portfolio.

In contrast to the U.S. portfolios, the portfolio of significant dividend paying value stocks performed worse than both, the overall value portfolio and the non-dividend paying portfolio. Still, respectively it showed on average 135%, 175%, 201%, and 162% times higher compounded returns than the index portfolio.

Risk and Returns

Just as in the S&P 500, the non-dividend paying portfolio showed the highest variance. This is likewise attributable to high losses in the years 2008 and 2011 and significantly high returns in 2009 and 2013. We will look at this detailed in the next two chapters.

By looking at the Sharpe ratio, we see that for the STOXX 600, the non-dividend paying portfolio is – risk-adjusted – notwithstanding the best investment choice for the value investor.

Average Performances over 1-Year Holding Periods

When we compare the average performances and returns of 1-year holding periods, we can see that the overall value portfolio on average outperformed the index portfolio. Just as the premiums of the non-dividend paying portfolio becomes apparent.

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Compounded Dividends

Until now, we haven’t considered the dividends which are paid out to the investors. We have focused solely on the returns of the stock itself. 

While it is usually not standard practice to take the paid out dividend into account when comparing the overall returns of a portfolio, I still want to emphasize the compounding effect of significant dividend paying stocks.

By reinvesting the returns of extraordinarily high dividends, one can also achieve an impressive compounded portfolio return which indeed outperforms all other portfolios significantly.

Over all periods, the average dividend yield of companies within the S&P 500 significant dividend paying value portfolio was $4.67 – ergo on average $4.67 are paid out per held share.

When we look again at the 11-year compounded portfolio returns, we can see what a difference re-invested dividends can have. 

By investing in significantly dividend paying value stocks, we killed two birds with one stone:

  1. In the U.S., significant dividend paying value stocks achieved a superior return by outperforming the index and a normal value portfolio.
  2. By investing in value stocks which pay a very high dividend, we – at the same time – collected handsome dividend payments each quarter.

Overall, $100 invested in 2006 into a significant dividend paying portfolio, which is re-adjusted every year, and by assuming that each year all dividends are re-investing tax-free, would have turned into $1,374,82 in December 2016, which is an unbelievable 1,375% gain over 11 years.

Caution: please keep in mind that the portfolios as seen in the last graph and the following graph cannot be compared as easily because all other visualized portfolios have not re-invested the dividend payouts.

A similar, but not as spectacular, performance was achieved in the STOXX 600 index in Europe. €100 invested in 2006 turned, under similar conditions, into €477.68 in December 2016 – which is a 377.7% gain compared to an overall 30.1% gain of the index or an 83.7% gain of the overall value portfolio.

All in all, these spectacular compounded returns make clear, that the combination of a low price-to-book ratio and a very attractive dividend can lead to spectacular returns for the value investor – if dividends are reinvested.

During the Crisis

In an interview, Warren Buffett once famously said: “The first rule of an investment is don’t lose. And the second rule of an investment is don’t forget the first rule.”

“Rule No. 1: Never Lose Money
Rule No. 2: Never forget rule No. 1”
– Warren Buffett

The priority of each investor should be to avoid losing money.  The best way to avoid losses is to get out of the market at the right time. However, it is hard to time the market. If you time the market incorrectly, you may – as well – lose a lot of money.

Ergo, the investor who tries to never lose money will find himself in a dilemma: 

  • If he fails to time the market crash and gets out too early, he will lose money.
  • If he fails to time the market crash and gets out too late, he will also lose money.

Or as Peter Lynch once said: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Yet, if you sense a crisis brewing, it’s better to act early or quick. This way, you can avoid losing much of your portfolio – as we will see in this chapter – and you get the chance to profit extensively as the market recovers – as we will see in the next chapter.

Global Financial Crisis 2007 – 2008

The first major crisis of my study which massively affected the United States and Europe was the financial crisis of 2007 to 2008. Both, the S&P 500 and STOXX 600 saw large two-digit losses. Which is why we might sense why Warren Buffett’s rule – to never lose money – is so significant for investors.

While the S&P 500 performed better than the STOXX 600, U.S. stocks still lost 39% from January 1st to December 31st of 2008. European stocks saw a 44% loss over the same period.

Let’s put this into perspective: €100.000 invested into a STOXX 600 Europe index portfolio in January 2007 turned into €66.000 in December 2008. I would say it is better to be careful than to be sorry.

What was one way for investors to “loose less”?

One simple strategy a value investor might advise would be to follow a value investment strategy.

Unfortunately, things were different in 2008. The value portfolio performed just as poorly as the overall index.

In the S&P 500 – both – the index portfolio and the value portfolio lost 39%. In the STOXX 600, the value portfolio performed slightly better, with a loss of 41% (versus a 44% loss of the index)

A simple value strategy was apparently not the best way to lose less. But is there a value strategy which can help us?

As it turns out, at least in the S&P 500 there was a way to lose less.

In the S&P 500, a significant dividend paying value portfolio performed around 9 percentage points better than the index and the overall value portfolio.

However! In the STOXX 600, the significant dividend paying value portfolio performed 6,2 percentage points worse than the index and 15,4 percentage points worse than the value portfolio.

On the opposite, value stocks which paid no dividends performed the worst. When compared to all other portfolios, the non-dividend paying portfolios showed the highest loss in both indices, with losses of -67% in the STOXX 600 and -50% in the S&P 500.

Let’s expand the holding period and look at the portfolios over a 2-year holding period from January 2007 until December 2008.

When we consider a longer holding period, from January 2007 to December 2008, the cushioning effect of the value premium becomes clearer. 

The STOXX 600 value portfolio performed 7 percentage points better than the index. Alike in the S&P 500 where the overall value portfolio performed 5 percentage points better than the index itself.

In the S&P 500, the significant dividend paying portfolio performed best with a loss of only 24% – which is a 23% better performance than the index itself.

However. In Europe, the significant dividend paying portfolio performed just as bad as the index and worse than the overall value portfolio.

If we can conclude something from this short holding period during the crisis of 2008, it is that an overall value strategy is generally not bad advice. Both value portfolios performed better than their respective index.

But from the 2008 crisis alone, we cannot draw conclusions whether it is worthwhile investing in either high dividend paying or non-dividend paying value stocks, to avoid losses. It may be worth it for investors in U.S. markets, as value stocks which paid high dividends outperformed the S&P 500 index. But in Europe, value stocks with high dividends performed worse than the overall value portfolio. Even riskier were stocks which paid no dividends – especially in Europe where we were able to see a painful loss of 66.8%.

It is irresponsible to make assumptions based on this finding. Luckily, we have one more financial crisis we can look at.

European Debt Crisis

In 2011, another economic crisis hit Europe. During the European debt crisis, all portfolios of the STOXX 600 showed significant losses. Again, the non-dividend paying value portfolio showed the highest losses of all portfolios, losing 31% or 20 percentage points more than the STOXX 600 index. 

Not only that. In the S&P 500, the only portfolio with a loss was the non-dividend paying value portfolio, which suffered a significant loss of 15%, while the S&P 500 index and the S&P 500 value portfolio stagnated.

The most interesting observation is that the significant dividend paying value portfolio of the S&P 500 gained 15% during a financial crisis, while the index and the overall value portfolio stagnated, and the non-dividend paying portfolio lost 15%.

The value investor would’ve – once again – been best off by investing in U.S. value stocks which pay a significantly high dividend – which gained 15% while European stocks lost an equal amount.


The key takeaway from this observation is that when an investor is absolutely certain that there will be a correction, it is likely best to rebalance towards holding cash or at least a more conservative value portfolio. 

The active value investor might reduce his losses by looking specifically at significantly dividend paying value stocks in the U.S. market, while being especially cautious of the European stock market.

At the beginning of a recession, one thing the value investor should avoid at all cost is a portfolio of non-dividend paying value stocks, which – during a financial crisis – showed the highest losses of all portfolios. But as we will see in the next chapter, value stocks which pay no dividends compensate for much of the large losses as soon the stock market recovers.

After the Crisis

Investing in a crisis is a high-risk, high-reward strategy – especially with value stocks which pay a high or no dividends.

After the Global Financial Crisis 2009

To find the answer how we should invest after the market has already collapsed and is about to rebound, let’s look at the portfolio returns in 2009, the first year after the financial crisis of 2008.

The non-dividend paying value portfolio is an eye-catcher again, this time positively.

In 2009, the non-dividend paying portfolio of the S&P 500 showed an 80% gain. Even more so in the STOXX 600 with 87%. This means in both indices, the non-dividend paying portfolio outperformed the index by more than 53 percentage points.

But not only when compared against the index. In the S&P 500, the non-dividend paying portfolio even outperformed the value portfolio by more than 31 percentage points. This is impressive.

After the European Debt Crisis 2012 and 2013

The exceptionally well performance of the non-dividend paying value portfolio is also observable 4 years later in 2012 and 2013.

In 2013, the non-dividend value portfolios in both indices were outliers, with significant gains of 57.47% in the STOXX 600 and surprisingly also in the S&P 500 with 52.16%. In the same year, the index, and the overall value portfolios only gained around 14 to 22 percent, thus value stocks which pay no dividends outperformed all other portfolios by more than 34 percentage points in 2013!

Compounded over a 2-year holding period, starting from January 1st 2012, the non-dividend value portfolio of the STOXX 600 returned 104% compared with a 40% return of the overall value portfolio and a 37% of the index portfolio.

As we’ve seen in the last chapter, non-dividend paying portfolio performed worse during the financial crisis. However, non-dividend paying value stocks also recovered the fastest and the strongest in the first and second year after the financial crisis.

For active investors, it might be interesting to avoid non-dividend paying value stocks in troubling market conditions, where a market crash seems unavoidable, and focus on non-dividend paying value stocks as soon the market hits its low and recovers.

Long Term Investing

Let’s leave the short term performance aside, and look at the compounded portfolio returns over a longer holding period of 8 years, starting in January 2009 – just after the 2008 financial crisis.

Looking at the returns over a longer period of time shows us that it is worth paying a closer look at the non-dividend paying value stock portfolio. Over 8-years – starting after the global financial crisis of 2008 – the non-dividend paying value portfolio achieved a fabulous compounded return of 336% in the S&P 500 and 433% in the STOXX 600, while the index portfolio only showed a meager return of 147% and 98% respectively.

Therefore, as a value investor, a very interesting way to profit handsomely after the market crashed is to invest in non-dividend paying value stocks.

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Making Sense of Dividends

When investing in stocks, dividends are often an important consideration for many investors. While dividends are for some investors an essential “must criteria”, other investors prefer growth stocks which don’t pay dividends, but instead have a bright outlook with an anticipated high appreciation of the stock price.

As the study shows, dividends can make a real difference for investors. But as it seems, investing in “value dividend stocks” – which I define as value stocks which either pay a significantly high dividend or no dividend at all – is not a strategy to avoid losses. Instead, it has proven – after two recessions – to work as a strategy to achieve handsome returns as soon the market is recovering.

After both crises, especially the non-dividend paying portfolio outperformed all other portfolios significantly. But – as we have seen – this performance also comes with its risk because non-dividend paying stocks also performed worst during the market crash.

This chapter will blend theory and the research findings, to ultimately make sense of what the value dividend study found out.

Dividends in Europe

When it comes to dividends, the first thing we can observe is that on average, more European companies are paying dividends than U.S. companies. From 2006 until 2016 on average 89% of European companies in the STOXX 600 paid dividends to their investors, while only 79% of the S&P 500 did so. In other words, 11% of European and 21% of U.S. corporations did not pay dividends at all.

What may be one reason why more European companies pay dividends?

The fact that more European companies are paying dividends may show that European companies are more mature, while the S&P 500 is home to more growth companies.

Differences in investors mentality may also explain why more European companies pay dividends than in the United States. European investors might be more risk-adverse and thus have a higher and possibly unreasonable demand for dividends. This might lead European executives to introduce dividends earlier or continue paying them even though the financial situation of the company does not allow it.

Could this possibly explain the extraordinary high returns of European non-dividend paying value stocks – which risk adjusted showed the highest returns of all European portfolios?

Possibly. As a result of paying dividends more often, earlier, and longer, most European companies might have less free cash flow than their U.S. counterparts and thus less money to invest in the future growth of the business. Hence, European companies which refuse to pay dividends stand out. They can reinvest their free cash flow more wisely and – over the long term – outperform companies who bow to the irrational demand of investors for dividends.

While we look at the European market, could it be true, that due to investors pressure, European companies are especially reluctant to stop paying dividends, even though the financial situation requires it?

As we’ve learned, research indicates that investors believe that “dividend cuts are bad news”. It may be the case that European investors think so more often than U.S. investors. As a result, numerous European companies worsen their financial situation and forgo profitable investment opportunities simply because they stick with current dividends to satisfy the expectations of their shareholders.

On the other side, companies which do not pay dividends avoid this dilemma. They can allocate their free cash flow more profitably, for example by investing in promising and profitable investments which will lead to positive cash flow in the future. This might explain why non-dividend paying value stocks on average outperformed all other portfolios of the STOXX 600.

However, non-dividend paying value stocks also showed the highest losses during the 2008 financial crisis and the European debt crisis. Shouldn’t a higher free cash flow act as a secure buffer during times of crisis?

As non-dividend paying companies do not pay dividends and cannot show a proven history of reliable dividend payments, investors might irrationally characterize them as particularly bad or risky businesses during times of crisis. As a result, when liquidating a portfolio, investors first sell these non-dividend paying “high risk” stocks. This, in turn, leads to a temporary undervaluation of non-dividend paying stocks.

When these companies become aware of their unjustified undervaluation, a capable management will begin to buy back shares at a significantly undervalued stock price. This leads to an immediate return for the shareholders of the company as important metrics of the stock improve and the share price appreciates. Combined with a substantially higher free cash flow and a profitable product, these companies will – in return – attract new investors. This is correcting the temporary undervaluation in the first two years after a financial crisis, and thus investors who invest in non-dividend paying value stocks at the right time during the crisis achieved exceptionally high returns.

Dividends in the United States

Compared to Europe, there are more companies in the United States which do not pay dividends.

Investors in the U.S. either don’t demand dividends as loud as European investors, or more U.S. companies don’t easily give in to the irrational demand of their investor for dividends. Instead, if possible, the management improves shareholder value with means apart from dividends.

Either way, in the U.S. fewer companies pay dividends merely because investors demand it. As a result, companies who do not pay dividends act more freely and use the free cashflow to achieve their potential by reinvesting free cash flow into profitable projects or repurchase their undervalued shares.

Paying No Dividends

Investing free cashflow is not the only factor. As research suggests, cutting or suspending dividends, can be one of the cheapest ways to ‘raise’ capital. A company which reduces or stops paying dividends can use the resulting cash as a form of cheap capital to finance profitable future projects. This goes hand in hand with the researchers Fama and French, who showed that companies with a low dividend yield invest more into projects which likely turn out to be profitable in the future. Companies might even use a zero-dividend-policy as a way to indicate to investors that they have profitable investment opportunities at hands, which in turn attracts growth investors. 

Independent of the holding period of the portfolio, the non-dividend paying portfolio on average outperformed all other portfolios in both indices in Europe and the United States. This suggests that value investors are most of the time better off by holding a portfolio of stocks with a low price-to-book ratio and a dividend yield of zero.

However, as we have seen, it’s not that easy. During times of financial crises, non-dividend paying value stocks did – in both indices – show the highest losses. This resulted in a large variance which – for many – is an exclusion criterion.

Paying High Dividends

As we’ve seen, value stocks in the S&P 500 which pay a very high dividend also – on average – outperformed the index and even the overall value portfolio. How can we make sense of the superb performance of U.S. value stocks, which pay a significant dividend?

Donald Yacktman – value investor and president of Yacktman Asset Management – might give a valuable hint why.

According to Yacktman3, companies who recently raised their dividend rate have – in the best case – already gone through several steps to invest their free cash flow in a shareholder-friendly way. These steps are:

  1. Reinvestment into the business for future growth,
  2. Acquisitions to grow the business, 
  3. Repurchasing shares below intrinsic value, and 
  4. Reducing their debt.

As a result, companies who are paying a really high dividend have already done everything they could to increase shareholder value. Raising dividends to a very high level is – so to speak – their last resort. Exactly because these companies have already gone through all these steps, Yacktman calls them future-proof and attractive for investors.

That Yacktman cannot be that wrong is shown by the compounded returns of the re-invested high dividend paying value portfolio, which outperformed all other portfolios by a magnitude.

Withal, extremely high dividends should simultaneously work as a warning sign, as some malicious management could use it to deceive investors. Proper due diligence is always important but especially with stocks which pay such high dividends.

Study Resume

Whether we look at value stocks which pay high dividends or those who pay none. We can be certain of one fact: dividends are more important for the value investor than previously assumed.

In the S&P 500, we saw that investors can achieve higher returns than an overall value portfolio with both approaches. In Europe, non-dividend paying value stocks significantly outperformed all other portfolios.

The significance of this is not to be ignored. For an average holding period of 8 years, an investor in the STOXX 600 would have realized on average a return of 32% when investing the in the index, compared to a 70% with a regular value portfolio or a whopping 130% return when investing in a non-dividend paying value portfolio. This is a premium of 98 percentage points versus the index and a premium of 60 percentage points versus the regular value portfolio.

This effect is even more significant in the United States. While the index showed, over the similar average holding period of 8 years, a return of 70%, an investor in a non-dividend paying value portfolio would have gained 214%. This is a premium of 144 percentage points. Even when compared to the overall value portfolio, which gained over an average 8-year holding period 108%, we still see a remarkable premium of 106 percentage points over a typical value investment approach.

The returns of the significant dividend paying value portfolio are even higher, when we take the paid-out dividends into account. By re-investing dividends, the investor can achieve spectacular returns with a portfolio of significantly dividend paying value stocks.

The fact that dividends can play such a significant role in improving the returns of a value portfolio make it impossible to ignore them. Therefore, the findings I present in this book have significant implications for the individual but also the professional value investors as well as for fund managers in Europe and the United States.

Paying attention to the dividends of a value stock can help an investor minimize his losses during market recessions, while at the same time maximize his profits during market recoveries.

Over the last decades, researchers have looked at value investing and dividend investing as two separate disciplines. 

I hope that my little study will only be the very first step to solving all remaining questions when it comes to the value dividend strategy. Even more so, I hope that the results of my study will help countless investors beat the market and achieve profits for themselves by creating their own value dividend strategy – during tough times such as 2022 and beyond.

Authors note: Did you find the study and the presentation of the study interesting? Please help spread the Value Dividend Strategy to the world by reviewing the book on Amazon and Goodreads. It takes only a few minutes, and it really means the world to me!

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  1. Lakonishok, J., Shleifer, A., & Vishny, R. W. (1994). Contrarian investment, extrapolation, and risk. The Journal of Finance, 49(5), 1541-1578. 

  2. Rousseau, R., & Van Rensburg, P. (2003). Time and the payoff to value investing. Journal of Asset Management, 4(5), 318-325. 

  3. Tian, C. (2017). Invest Like a Guru: How to Generate Higher Returns At Reduced Risk With Value Investing: John Wiley & Sons. 

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