A steely eyed look at dividend investing

Investment styles

There is a better way

There are many different styles of investing. Growth investing and value investing come immediately to mind. But there are many others including momentum, sector rotation, factor, formula and so on. One distinct style that is very popular is dividend investing. In this post I will take a hard look at dividend investing.

Dividend investing

The basic idea as explained in one blog is that “companies with a long history of dividend growth will generally show a strong business model and robust financials. They have gone through many recessions and never stopped increasing dividend payments.”

The blog states: “In fact, many studies (such as Vanguard) have proven that dividend growers are likely to outperform the market and do it with less volatility.” This assertion cherry picks one observation from the Vanguard report and is misleading out of context.

Dividend investing has a real attraction. It does connect with many investors’ ambitions to never live off capital. There are three answers to this: First, it does not perform nearly as well as some investors think; and, second, it carries with it some unexpected risks; and third, there is a better way.

Vanguard report

The Vanguard report referred to examines two popular dividend strategies: high-dividend-yielding and dividend growth equities.

It concludes: “Our analysis finds that absent beneficial tax treatments, dividend-oriented equity strategies are best viewed from a total-return perspective, taking into account returns stemming from both income and capital appreciation.”

Many investors are attracted to dividend strategies because dividend yields look really good compared to bond yields. Vanguard points out that this increases portfolio risk (equities riskier than bonds) and exposes dividend investors to higher risks from future interest rate increases compared other kinds of equities.

Finally, the Vanguard report does not say there is evidence dividend growers will outperform the market. On the contrary, it says the performance of dividend growth strategies has been dependent on the time period of measurement and is ‘largely explained’ by other factors.

For example, in the U.S. the strong historical performance of dividend-oriented strategies has been time-period-dependent, with much of their outperformance realized during the technology stock bear market of 1999–2000. In Canada, over the last ten years much of the performance of dividend oriented strategies depended on whether you were substantially exposed to banks (good) or exposed to the energy sector (bad). As well, in Canada in the last ten years, the S&P TSX Composite has been a pretty low bar to hop over.  

Evidence of outperformance

When thinking about performance, it is important to distinguish between price return and total return. Look at the following chart. It shows the performance of the Blackrock iShares Core Dividend Growth ETF from 2014 to 2021. It has some $17 billion in assets.

The DGRO slightly underperforms SPX. But, that is comparing apples and oranges. DGRO shows total return. SPX is a price return index. The better comparison is DGRO vs SPXT. The latter is a total return index. We can let Morningstar explain the difference.

Total Return and Net Return Calculation

Price-return indexes gauge the change in prices of index constituents. Total-return indexes, on the other hand, reflect the changes in both prices and reinvestment of dividends paid by the index constituents. The dividends distributed are reinvested in the index based on the weights of constituents as of the ex-date. For report see here.

When we use the correct index, DGRO underperforms the SPXT by some 45% over the period. In other words, the U.S. dividend growth strategy would have underperformed a simple S&P 500 index strategy on a total return basis over the period

An alternative to dividend investing

The solution to the dilemma is explained by Vanguard in a recent report. They tell us that the smart response to shrinking yields is total-return investing:

A total-return strategy supports retirement savings and, in retirement, spending through both portfolio yield and capital appreciation. This approach allows an investor to address their needs without relying entirely on portfolio yield. The total-return strategy addresses portfolio construction in a holistic manner, with asset allocation driven by the investor’s risk-return profile.

This same conclusion was expressed by a Canadian investment advisor Tom Bradley of Steadyhand Investment Funds Inc. in a recent note published in the National Post on June 5, 2021. I have always respected Tom’s views.


Dividend investing has a superficial attractiveness. When we dig into it, it may not perform as well as we expect; it may carry more risks than we expect; and, there is a better way.


To understand better how dividends fit with a company’s approach to capital allocation take a look at my post The Hullabaloo about Dividends


To dig a little further into basic investment principles, what Ben Graham called Principles of Operation, take a look at Part 4: Principles of Operation

That part contains a chapter titled 25. Investment styles

After an introduction, the chapter contains the following Sections:

25.01 Trading

25.02 Investing and gambling

25.03 Aggressive strategies

25.04 Market timing

25.05 Momentum investing

25.06 Sector Rotation

25.07 Formula investing

25.08 Buy and hold investing

25.09 Passive investing

25.10 Predictable earnings

25.11 Dividend investing

25.12 The big non-cyclical growth stocks

25.13 Copying Berkshire Hathaway

25.14 Stock styles

25.15 Contrarian investing

25.16 Value Investing and value stocks

25.17 Computer based value factor investing and smart beta

25.18 Growth investing

25.19 The investing style of the great investors

25.20 Warren Buffett

25.21 Philip Fisher

25.22 John Templeton

25.23 John Maynard Keynes

25.24 Conclusion regarding investment styles and core principles


You can reach me by email at rodney@investingmotherlode.com


Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.


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