When It Comes to Dividends, Surprises Matter More Than Consistency

Though dividend-oriented strategies have lagged during the bull market lately, investors continue to seek out yield. In the ongoing dividend growth versus high-yield debate, Societe Generale's quantitative strategist Andrew Lapthorne weighs in on the side of growth-but not the way many people invest in it.

iStockphoto

In a note this morning, Lapthorne says consistent dividend growth can yield better risk-adjusted returns, but overall performance is less impressive. Instead, looking for companies that can deliver dividend surprises-the good kind-may generate better returns.

To set the stage, Lapthorne divides dividend growth strategies into two. The more popular approach looks for consistency of past dividend payments, underpinning Dividend Aristrocrats strategies (like the ProShares S&P 500 Dividend Aristrocrats ETF (NOBL)), while the other focuses on the magnitude of growth. In the U.S. and Europe, portfolios that focused on trailing dividend growth performed better over a period between 2003 and 2018 than any of the other dividend-oriented factors, including 10 consecutive increases.

But Lapthorne says he was surprised dividend growth's performance wasn't even better. One possible reason: Valuation. "Unlike a high yield approach, where an assessment of valuation is embedded in the investment process, dividend growth has no consideration for the purchase price of the company," he notes.

As a result, focusing on the companies most likely to see upside dividend surprises may generate better returns. The three best factors to predict such surprises: Earnings and price momentum, dividend cover and last 12-month dividend surprises.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.