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Dividend-paying stocks tend to outperform non-dividend-paying stocks over the medium and long term, according to Morgan Stanley’s 2023 Dividend Playbook released Wednesday.
The report says that most of the outperformance occurs during large market pullbacks, such as those in 2000, 2008, 2015 and 2020.
There are two possible reasons, according to MS analysts.
First, dividend-paying stocks have relative stability “due to the guaranteed positive return on dividend payments.”
Dividends have accounted for almost 40% of total returns over the last century.
The second reason, according to the report, “is quality bias.”
Paying a dividend alone does not necessarily lead to price appreciation over time, but “the group of companies that make the long-term decision to pay a recurring dividend annually (is what would lead) to appreciation over the longer term.” term, to inclusion in large-cap indices (survival bias) and lower volatility during market crises.”
In contrast, paying a dividend is less favorable for small-cap stocks, such as Russell 2000 stocks (RTY), compared to large-cap stocks, and is “harmful” over time for consumer discretionary stocks ( XLY).
Additionally, MS analysts said the market prefers reinvestment through capital expenditures (capex) or research and development (R&D) within consumer discretionary (XLY) rather than dedicating capital to its dividends.
However, dividends have still outperformed non-dividend payers in the high-growth technology sector (XLK).
For Healthcare (XLV) and Staples (XLP), performance between payers and non-payers is more moderate, according to the report.
“Within these sectors, payers versus non-payers have performed in line since 2000, but interestingly, a performance gap has recently opened up in the post-Covid years,” the MS analysts said. “Generally, relative outperformance occurs during market volatility.”
For Materials (XLB), Industries (XLI), Utilities (XLU) and Real Estate (XLRE), the benefit of paying a dividend over those that do not pay is greater.
Companies that are in the group that pays dividends tend to be more stable.
To explore this data, MS analyzed 183 large-cap stocks in the Russell 1000 (NYSERCA:IWF) that have initiated a dividend since 2000. The brokerage found that, over the long term, stocks that initiate a dividend tend to outperform their peers at the index, sector, and industry group level over the medium to long term.
Significant outperformance, measured at more than 5%, “typically takes two to three years to appear in our data, but increased as we extended the analysis to a longer time period.”
