Dividend Stocks: Less Of The Upside And More Of The Downside

Tyler Durden's picture

While bubble-spotting among equity investing tilts is often futile, the ever-increasing call for investors to buy high-quality dividend-paying stocks has become as over-used a term as 'long-term investor', and 'buy-the-dips'. It seems the general belief is that a 3-5% dividend yield will provide 'protection' to cushion volatility as it offers income above Treasuries. Back in September we highlighted both the apples-to-unicorns comparison that is dividend yields to TSY yields and moreover, how risk (and ultimately capital loss) should play a critical part in the decision of asset allocation. Today we take a quick look at dividend stock performance over the last few years and find something intriguing - and not often mentioned - that dividend stock portfolios appear to significantly underperform in sell-offs and marginally underperform in rallies. So if you want a high beta crowded trade, admittedly with some carry, buy high quality dividend-paying stocks.

Eviudently, based on Goldman's high quality dividend-paying stock focused portfolio, when markets significantly sell-off, dividend-paying stocks will tend to notably underperform (up to 5% over the last 4 years). Unfortunately, the upside beta is not as tilted in your favor with underperformance in extended rallies and furthermore only around 1% outperformance in modest sell-offs. Of course, during these moves, the dividend will indeed cushion the moves - well shift it up - but the point is that the performance of the portfolio itself is adjusting for the dividend relative to the market and so there really is no free lunch.

One more item of interest is the growing belief that corporations will borrow to fund buybacks or increased dividends. The latter is a little less financially flexible for the corporation, however, the market seems to believe this will happen as forward option implied dividend expectations (basically a way to look through forward option prices to infer expectations of dividends) are set to grow significantly over the next two years with the dividend yield looking to reach 2.5% in the next 2 years (for SPY this is). It certainly seems like markets are 'decided' that this is the way it will be and crowded trades such as this never end well.

Charts: Bloomberg

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Timmay's picture

How do I download the iQuit app?

Spooky Polish's picture

Simply press ctrl+alt+del on Your touchscreen

trav7777's picture

2.5% is high quality dividends?  LOL


vast-dom's picture

IQuit: drool drool from the extreme left tail of the bell curve.


iHelp uGood.

oogs66's picture

most overhyped trade ever....no real rationale behind it either.

GeneMarchbanks's picture

Obviously yield. The Boomers worship them since the 08 debacle.

css1971's picture

Well. The credit bubble has popped and the boomers are retiring.

Stock P/Es are going to decline from the what 20ish? average at the moment to single digits over the rest of the decade, whether it's quickly or slowly. So you aint going to make money from capital growth.

Continued bailouts /QE to push up GDP will also push up inflation and  wipe out sovereign bond yields even as yields increase. So you ain't going to make any money from bonds.

Property is still falling both in capital and income terms.

You're down to commodities and stocks and corporate bonds which deal with commodities... and ...

Basically that's it as far as I can see. Both cases yield, but only on specific stocks/bonds.

No growth for 10 years. Not in the west anyway, maybe never if there is nothing to replace the energy we currently consume.

Stagflation Bitchezzzz.

JuicedGamma's picture

Sure there is, it's basically the same trade Corzine made at MF, borrow a bunch of money at 1 - 1.5% and buy a shit load of paper paying 5,6 or 7%.  Hell go all in with AGNC or NLY they're paying almost 20%.

But then again maybe you are better off with smoe gold buried in the backyard and some spare amo.

Stax Edwards's picture

All of that with a white chart to boot, ouch!  

I am feeling your wrath TD, lol

midgetrannyporn's picture

Still beats GS stock where the bankers keep all the profit, stock options, all the upside, pay little in the way of dividend, then hand all the losses to shareholders and taxpayers.

El Viejo's picture

Rather have my 3-4% Tax free munies.

fuu's picture

So another Hobotrader bashing thread?

<gets some popcorn>

BlueStreet's picture

Div stocks make even less sense in a market where 70+ percent of stocks are moving together based mostly on headlines.



Jean's picture

But my energy div stocks just feel safer ...

Caviar Emptor's picture

Now that they've corralled the sheep into the same trade, guess what happens

Archimedes's picture

Not trying to be a fly in the ointment but does anyone have any insight on why the retail was so strong?

SDRII's picture

For the same reason that the unadjusted business sales were down while the adjusted sales grew. Or the same reason that the new orders, unfilled orders and inventory not to mention employment fell in the Empire survey yet the expectations spiked (and the headline improved). Charles Evans just said that he doesn’t pay attention to the month to month numbers anymore as they are less relevant. In other words, not even the fed will eat its own (brethren) fecal matter

I am a Man I am Forty's picture

such generalities, buying BP recently at 35 and CVX recently below 90 is how you make money buying dividend paying stocks, these are just 2 examples of opportunities, there are a bunch more out there, make your laundry list, when the market crashes again, buy

Jean's picture

PM has been good to me, the sheep run from bad US press and PM just keeps rolling in the cash from people who don't read the US press.

grey7beard's picture

>> buying BP recently at 35 and CVX recently below 90 is

You da man!!!  CVX was below 90 for a nano-second and BP didn't hit 35, and you bagged them both.  You simple can't expect legendary greatness like that from most other stock professionals.  Please don't compare mere mortals to yourself.

I am a Man I am Forty's picture

sorry, didn't add the change you fucking dipshit, both were well timed, but it isn't that fucking hard if you watch the price of oil and you wait for the shit to hit the fan in the market, you could also go back a year in CVX and it was dirt cheap, it was cheapest of all of the big boys paying one of the best dividends.

I'll make a future call on a stock.  Heartware, HTWR, in 6 months it will be up 30 plus percent.  Buy under 64.

dirtbagger's picture

When it becomes a stock picker's market it basically means that nobody has a F______g clue what the market is doing

tekhneek's picture


Not like it's news, it's just funny: 250% on the greece 1 year bond ... and somewhat of a milestone.


Jean's picture

At what point does putting a few chips on red in case of some crazy euro land restart become not insane.

css1971's picture

I would have bought some if I could.

I am however, retail.

Blackrock have a sovereign bond ETF which covers the EU, mostly Italy and Germany. It'll be tanking about now.


gdgenius's picture

Well, you certainly picked a shitty dividend fund to use for your comparison. That's not to say I disagree with the conclusion that the "high-quality dividend paying stock" space is overcrowded and expensive, but that is one ugly fund you picked...I'm sure it has nothing to with it being goldman's fund either :)

topcallingtroll's picture

Everything stock class in the first world is overvalued. We capital owners are to blame by letting management get away with stuff that prwvious generations of investors would not countenance.

I think Asia and Latin America is where the action will be. As an owner of capital I like my workers and management scared and working hard.

CORNGUY's picture

I have a feeling a Lemonade stand would generate a more consistent return than the div stocks

Pete15's picture

What about Schiff and Euro Pac, is their idea of high foreign dividend paying stocks a bad idea??

Pete15's picture

Anyone with more knowledge than myself care to elaborate more 

catch edge ghost's picture

I have a great deal of knowledge about your specific situation. Allow me...

Neither solicit nor accept investment advice from anonymous chuckleheads on a blog or its forum.

wcvarones's picture

Maybe Goldman picks shitty dividend stocks.  Probably a bunch of crappy financials.

I've been in large-cap tech dividend stocks with good balance sheets, and they have outperformed nicely.

jcaz's picture

LOL-  yep, that's why AAPL and MSFT have been returning all that cash to shareholders so effectively all these years....

Nice to see someone call bullshit on this topic, tho-  can always tell when my clents are watching too much CNBC, when they start emailing me about this "buy the dividend stocks" crap;

Stocks- the New Bonds.  NOT......

imapedestrian's picture

Tyler needs to take his Cymbalta (a product of a high quality dividend stock).

Come on... I am sick and tired of nothing but negative, cynical thoughts pouring out of Durdens keyboard... I just might have to find another website to waste my time at.

What I like about some of these stocks is that they make stuff that people need.  NUE is a great example.  Sure steel demand is weak and might get weaker, but my long-term money says that the excellent managers there will guide the company through tough times and it will be stronger.  Will/could the price fall futher... sure.  Corporations are living things and can adapt and transform themselves... they can survive wars, collapses, disasters, etc.  Plus, where else would you put your money... all in gold?  I like gold and I own gold... but I am not some fanatic that owns just gold. 

The high quality, dividend paying play is not overdone.  I actually work as an investment manager and have people calling every week complaining that they cannot live on CDs anymore... they are dipping into principle.  They are now open to the idea of stocks, and bonds.  No way this is a crowede trade...yet.  After this is over I do worry where to go... back to a broke FDIC insured bank deposit?


fuu's picture

From your profile:

"I am a very important person who makes lots of money. I am also really smart and do not like associating with anyone who is not at least as smart as me. I am cynical and unhappy and cannot wait until everyone else is as miserable as me."

Well on your way...


topcallingtroll's picture

I hope you get all the CD dependent folks invested in stocks. It will certainly help me!

If your clients are investing solely for income and the dividend seems safe then why not?

I dont see this article as gloomy. Hang out a little longer if you want to see some real gloom.

jcaz's picture

Oh no, don't leave- you'll make all of us cry...

Your clients are only NOW figuring out that CD's don't pay much?

Way to keep them informed.....

WhiteNight123129's picture

imapedestrian, Check out the production of crude steel coming from China, about 30-31% is exposed to construction. A skyscrapper consumes as much as 150 km of railroad in steel. There is a count of skyscrapper which is enormous. The steel industry in China is the most abnormal you can find. It grew post the massive 2002 Daqing riots in the rust belt of China, that was the biggest demonstration of workers since Tian AN Men, and guess what in 2003 there was U-turn from the previous downsizing of SOE in China, so back to SOE again. In Nov 2002, MacKinsey was doing a Conference in China about the overcapacity of Steel industry, since then China has made a huge increase in produciton capacity. IMF released recently a paper about CHina risk, in the page 30 of the appendix they made a calculation that essentially the Chinese steel industry which represents about 50% of teh crude steel is boxed, it can not grow further from this point without slashing the prices drastically. The problem is that the margins are already very tight. Despiste being hte largest steel manufacturer in the World, China has huge fragmentation? Why? It dates back almost to Mao which had this crazy idea of having peasants have a crude steel mill in their backyard (which was a huge failure). Today´s policy is for each local Chinese official to create employment by building a steel mill and then create construction projects to use the steel, the local gov is not motivated by pure profit but by bribes and by the fact that there was a reform on VAT which makes the municipalities cash hungry, a steel mill will generate VAT revenues for the state even if at the corporate level it is making no profit. The Steel intensity of China is already far higher than any country of the world expect Korea and Japan. CHina can never reach teh steel intensity that is the capacity of steel making per inhabitant of Korea and JApan unless they export to Mars. No wonder Hugh Hendry is long CDS on Nippon STeel!!!  Now the world is relying on 35% for crude steel from scrap, and yes the manufacturers using scrap will do better, but there is still about 25% overcapacity worldwide, given that CHina = 48% of world crude steel and in a downturn, given teh huge amount going to construction, if things are not properly "managed" by the polit buro the overcapacity will be hugely. At least short VALE against it. Chanos is short VALE and it make sense, if you shave 25% of total capacity, if iron ore is 65% and 35% is scrap, the brunt of the decline is iron. Iron ore is the most exposed commodity. A december Fitch report pointst to 1% of GDP in China = 8-9% in price decline of iron ore. Durden is cynical, but come on, we have a huge apex of credit going here, one needs to open a history book of cycle of credit expansion, what the Genova convention in 1922 resulted into huge credit expansion, you know the results.... We would need massive productivity gains in order to get out of hte mess.


WhiteNight123129's picture

You will have to raise your exposure as the tide goes down on Equities, and you find more bottom bear market level valuation. We are at 16 times 10 years real inflation adjusted to cycle valuation on S&P, with monetary environment you wnat to be what 2/3 long? That is madness to me, you can not win. Deleveraging is necessary, so either you get deleveraging by inflation and valuations get rammed, or you can deleveraging the hard way (Japan) which is to me close to completely impossible, if we tip back in deflation (we are already in stagflation) we will need devluation, (a peg against gold)? Then yes move full stock allocation, but at those levels? That is just madness. My target to be 90-100 in stocks is 550 on the S&P as we move lower, get out of your cash (that is Gold) and go into Equities as individually the tide going down unearhtes good pieces.

Flakmeister's picture

UIL is looking good, as is MO and RAI

In the MLP space, hitting 2 baggers with TNH sure was  nice... UAN looks good too...

ETE has performed very well since Mar 09....

In royalty trust space, HGT picked up at 10 and spitting off $1.40 a year looks pretty good as well..

Show me the cash flow...

topcallingtroll's picture

I dont invest in prima donnas. They are high maintenance and think the owners work for them.

That said there are some compelling GARP stories out there.

long-shorty's picture

I don't care specifically about dividends (which, admittedly, are a bit overdone--look at PHK and PGP (yikes!!)), but I am keeping with the high-quality bias.

Until the Fed succeeds in creating more inflation, 2011 is going to have marked the end of the outperformance of low-quality, and the beginning of the outperformance of high-quality.

Anyone who buys companies trading at "20x forward earnings" when the forward earnings would be record earnings, and the company has generated net profits of zero over the last decade, well, those folks deserve to lose money, and they probably will.


Singularity05's picture

Do your "dividend stocks" include banks and financials for the last 5 yrs? If they do, what do the returns  look like if you remove them over the same period? not that goldman said anything about excluding them. but any way

SwingForce's picture

Tyler, that's a shitty index to call "dividend stocks", 2nd largest holding is Apple which pays Zero-didly-shit-rate.  How about the XLU for a comparison? Or SDY? A different story, I think.

Grand Supercycle's picture

NASDAQ megaphone pattern on daily chart indicates a big move lies ahead.

SP500 monthly chart remains bearish and USDX weekly remains bullish, so it’s only a matter of time until the market makes its move.


Sequitur's picture

Well ZH had a good point a few months ago, when it showed in a dividends vs. bonds graph, that the yield on dividends fails to reward for the greatly increased risk equityholders take on. Very fair point and yes bonds are generally the way to go.

But the above graph is garbage, because GSPAX is shit. AAPL is second-largest holding, and GE sixth, and GE cut its dividend during crisis. Also financials make up 12% of the fund.

So invest in stuff people need, like water, electricity, food, medicine. Buy in at attractive valuations. The dividend at least tries to make management semi-honest, by paying investors cash every month or quarter. This is superior to garbage growth stocks, who play games via acquisitions, "management-led buyouts," or bullshit momo plays that will never pay out.

WhiteNight123129's picture

Nothing under 7% dividend stock. Find some with operations in foreign countries and in bullet proof business like tea plantation, a cork stopper business in Portugal at 10% or so DVD yield with 95% exports, if they go back to escudos, the workers get screwed and the real wages plunge (they are already plunging in EURO) so the margin expand (demand will get hurt too but at 10% DVD that is ok). You can also try to find some breweries operating in Africa at 7-8% dividend, they have a term of trade positive situation on their currency and the demand will be robust. Or go to Hong-Kong, but only Hong-Kong based stock, mainland stocks are usually a joke and in business which are not variable, toll tunnel business, data center.  WHen Hong-Kong is tired of denying that they love to be pegged to a ridiculous currency, your 7% dividend data center with 15% growth should do fine. But it is excessively difficult to find those names. For the rest 2/3 of your allocation in real cash that is..... Gold and Silver. See not all Equity guys are just plain idiots and ignore what is happening in bond markets and monetary affairs.... Shorting equities is not a good idea, I know you could get a repeat of blow-up specially in Europe, but what if they do a fiat print party? At least a long short, that for whatever long exposure in stocks have some real stupid name to short against it. Well anyway with that you end with real exposure at what 20-25%?? You need not to be afraid as SDR magic formula is announced on your equity shorts, and a new print party goes on, but then hard to see how Gold should get crushed under that environment.