Should you seek out dividend-paying stocks to form the core of your investment portfolio? For many readers this might sound like the old growth vs value debate – do you want high growth stocks (eg US tech) or do you want shares at a reasonable price that are not trading on excess valuations and pay steady returns?

But this would be somewhat misleading – here we want to just look at dividend-payers vs stocks that do not offer dividends.

Ned Davis Research carried out a study to find out whether investors are better off in dividend stocks or non-dividend stocks.

It looked at companies in the S&P 500 between 1973 and 2024, dividing companies into two groups based on whether or not they paid a dividend during the previous 12 months. It called the two groups “dividend payers” and “dividend non-payers.”

The “dividend payers” were subdivided further into companies that kept their dividends per share steady (no change), companies that raised their dividends (dividend growers and initiators), and companies that cut or eliminated their dividends (dividend cutters or eliminators).

Without getting into the weeds of the study, the key finding was that companies that grew or initiated a dividend - dividend growers and initiators - experienced the highest returns relative to other stocks during the 1973-2024 period and with significantly less volatility. This group delivered annual average returns in excess of 10%, versus 9.2% for the Dividend Payers category, 6.75% for No Change, -0.89% for Dividend Cutters and +4.31% for Non-Payers. 

While the usual disclaimer applies that past performance is not indicative of future results, the research underlines why clients are asking more about incorporating dividend stocks within their portfolios.

Why might this be?

Companies that consistently grow their dividends tend to display strong earnings growth based on solid fundamentals and consistently good execution. 

But, that does not mean the highest dividend payout is best. It’s about the second derivative – the rate of change in the payout – ie whether a dividend is initiated or raised versus being unchanged, cut or even scrapped.

Wellington Management’s research into dividend stocks going back to 1930 showed that it wasn’t the highest payers that delivered the best returns. The study divided dividend-paying stocks into quintiles by level of dividend payouts – ie the top 20% of dividend payers were in the first quintile, the next 20% by payout in the second and so on. The second quintile delivered the best returns over the period looked at. This, it’s thought, is because the highest payers were not able to maintain their high payouts and therefore were more likely to be classed as what Ned Davis Research would call a Dividend Cutter.

The two studies are not linked but they do highlight that focussing on dividends is an important element to investors.

It also underlines the importance of compounding and reinvesting dividends for maximising total returns.

NDR explains that this may be particularly useful information in the current environment. . Since March, the U.S. has entered a rare weak growth, neutral inflation regime—historically the best for Dividend Payers,” it says . “This is especially Growers, who have outperformed the S&P 500 by 6.2% annually. In contrast, Non-Payers tend to lag across most regimes, especially under weak growth conditions. Only during rising growth and falling inflation have Non-Payers outperformed the broader market.”

Key Takeaways for Investors: The Pros and Cons of Dividend Stocks