The Safety of Dividend Stocks

During those decades such as the 2000s where the stock market struggled to advance, dividends were a significant element for investor survival.  This is not only due to the dividends alone, but also the risk element of stocks that pay dividends.  Dividend stocks have historically provided lower overall volatility and stronger downside protection when markets decline. Since 1927, dividend stocks have consistently held up better than the broader market during downturns. You can measure downside risk through a statistic known as downside capture ratio.  Downside capture ratio is a statistical measure of overall performance in a down stock market. An investment category, or investment manager, who has a down-market ratio less than 100 has outperformed the index during a falling stock market.  For example, a down-market capture ratio of 80 indicates that the  portfolio measure declined only 80% as much as the index during the period. The downside capture ratio of high-dividend-yielding stocks, since 1927, has been 81% or lower over various long-term periods (table 1.2).  Put a better way, during months that the S&P 500 stock index fell, dividend stocks declined by nearly 19% less than the broader market.

DOWNSIDE CAPTURE RATIOS OF HIGH DIVIDEND STOCKS1927 TO 2011

Table 1.2

                                                                 Downside Capture Ratio

Since 1927

81.53

50-year

67.45

30-year

65.86

20-year

65.83

10-year

81.61

Source: Kenneth French as of 12/31/11.

With the increase in overall market volatility over the last decade, dividends will continue to cushion downside risk and offer a reliable form of return.

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