Previously, I analyzed the performance of some of the leading and largest actively managed mutual funds that focus on high-dividend strategies. Today, I’ll examine the strategy of investing in companies that have shown persistent growth in dividends.
But before doing so, it’s important to point out that a problem with dividend focused strategies is that because today only about one-third of stocks pay dividends, such a strategy is less diversified than strategies that focus on other well-known factors such as size, value, momentum, and profitability/quality. In addition, they can lead to concentration in sectors such as utilities, creating other risks (such as term risk). And, for taxable investors, dividends are less tax efficient than capital gains because you are taxed on the full amount of the dividend (instead of just the portion that is profit).
It is my practice to keep the list to a manageable number of funds, and to ensure that I examine long-term results through full economic cycles. I analyze the performance of funds over a 15-year period that ends December 31st, 2015. Furthermore, when there’s more than one share class of fund available, I will use the lowest-cost shares that were obtainable for the entire period.
This methodology creates substantial survivorship bias in the data. This occurs because we are considering only funds that survived the full period, and roughly 7% of all mutual funds disappear each year. Thus, the results are not reflective of what investors in these strategies actually earned using actively managed funds – they are biased upward. It’s a particular concern in this case because there are only seven funds that used a rising-dividend strategy and survived the full 15-year period.
Keeping that bias in mind, the following table shows the performance data for the seven actively managed rising-dividend strategy funds that survived. It also compares those returns to the returns of comparable funds (based on Morningstar’s investment style categorization) from the leading provider of index funds, Vanguard, and a provider of passively managed structured-asset-class funds, Dimensional Fund Advisors (DFA). (Full disclosure: My Firm, Buckingham, recommends DFA funds in constructing client portfolios.) The returns data covers the 15-year period ending December 2015.
DFA funds can be purchased through some 529 and 401(k) plans, but are generally only available through an advisor. An investor would incur fees from that advisor; those fees can vary greatly (in some cases they are very low) and cover the full range of financial planning services the advisor provides. Also, John Hancock recently introduced a series of ETFs that are managed through DFA (with expense ratios that differ from the DFA funds cited in this article). Investors can purchase those ETFs directly. Investors can directly purchase all Vanguard funds.
|
Fund
|
Symbol
|
Expense Ratio (%)
|
Annualized Return (%)
|
|
Large Blend
|
|
|
|
|
Eaton Vance Dividend Builder Fund
|
EVTMX
|
1.05
|
6.8
|
|
Fidelity Advisor Dividend Growth Fund
|
FDGIX
|
0.69
|
4.8
|
|
Franklin Rising Dividends Fund
|
FRDPX
|
0.91
|
7.4
|
|
T. Rowe Price Dividend Growth Fund
|
PRDGX
|
0.65
|
6.0
|
|
Vanguard Dividend Growth Fund
|
VDIGX
|
0.32
|
5.3
|
|
Average
|
|
0.72
|
6.1
|
|
Vanguard 500 Index Fund
|
VFIAX
|
0.05
|
5.0
|
|
DFA U.S. Large Company Fund
|
DFUSX
|
0.08
|
5.0
|
| |
|
|
|
|
Large Value
|
|
|
|
|
Gabelli Dividend Growth
|
GABBX
|
1.89
|
3.8
|
|
Vanguard Value Index
|
VVIAX
|
0.09
|
5.2
|
|
DFA U.S. Large Value III Portfolio
|
DFUVX
|
0.13
|
7.6
|
| |
|
|
|
|
Large Growth
|
|
|
|
|
Oppenheimer Rising Dividends Fund
|
OYRDX
|
0.81
|
5.7
|
|
Vanguard Growth Index
|
VIGIX
|
0.08
|
5.2
|
The following is a synopsis of the most important takeaways from this data:
- In the three asset classes for which there are comparable Vanguard funds, the actively managed funds outperformed in two.
- In the two asset classes for which there are comparable funds from DFA, the active funds outperformed in one.
- A portfolio of the actively managed funds, equal-weighted within each asset class and also equal-weighted in the three asset classes, returned 5.2% a year. The average expense ratio was 1.14%. An equal-weighted portfolio of Vanguard’s index funds would have returned 5.1%, underperforming the actively managed funds by 0.1%.
- In the two asset classes for which comparable DFA funds are available, an equal-weighted portfolio of the actively managed rising-dividend funds returned 5.0% a year. The average expense ratio was 1.31%. An equal-weighted portfolio of DFA funds in the same two asset classes returned 6.3% a year, outperforming the actively managed portfolio by 1.3% a year. The DFA portfolio’s average expense ratio was 0.11%.
Factor analysis
I’ll now take a look at the rising-dividend funds’ performance using the analytical tools and data available at Portfolio Visualizer. Factor analysis can provide important additional insights into a fund’s performance. This is valuable because Morningstar asset-class categories are very broad, and actively managed funds can style drift.
The table below shows the results of six-factor (market beta, size, value, momentum, quality and low beta) regressions. It includes not only a fund’s alpha, but that alpha’s t-statistic (a measure of statistical significance). Regression data is for the 15-year period ending December 2015. Each t-statistic is in parentheses.
|
Fund
|
Symbol
|
Alpha
|
|
Eaton Vance Dividend Builder Fund
|
EVTMX
|
1.8
(1.0)
|
|
Fidelity Advisor Dividend Growth Fund
|
FDGIX
|
-1.8
(-1.5)
|
|
Franklin Rising Dividends Fund
|
FRDPX
|
-0.8
(-0.6)
|
|
T. Rowe Price Dividend Growth Fund
|
PRDGX
|
-0.4
(-0.6)
|
|
Vanguard Dividend Growth Fund
|
VDIGX
|
-0.3
(-0.2)
|
|
Gabelli Dividend Growth
|
GABBX
|
2.3
(1.3)
|
|
Oppenheimer Rising Dividends Fund
|
OYRDX
|
0.0
(0.0)
|
|
Average
|
|
0.1
|
Two of seven actively managed rising-dividend funds produced positive alphas, though neither was statistically significant at the 5% level. None of the negative alphas were statistically significant either. The average alpha was 0.1%.
Summary
Consistent with the financial theory that dividend policy should not be an explanatory factor in returns, there isn’t evidence that the actively managed funds’ focus on stocks that provide high or rising dividends added or subtracted value. However, despite the theory and the evidence, many investors focus on dividend strategies, sacrificing both diversification benefits and tax efficiency.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.
Read more articles by Larry Swedroe
