The growing audience for dividends

Dividends are the hot new go-to investment theme these days.  James Bianco writing at the Big Picture wonders whether the hype has gotten ahead of itself.

However, any case for a new era of dividend investing may be a bit overstated.  Dividend stocks should simply be viewed as a slightly less risky form of stock investing.  As such, we should expect dividend-paying stocks to outperform during bear markets and underperform during bull markets.

The bigger question is whether there is a sea change going on in how investors view dividends.  According to academic research there already appears to be a built in audience for dividends.  Companies that pay a regularly scheduled dividend outperform in the month of their payment.

As we mentioned yesterday it behooves investors to recalibrate their return expectations given the low rates found on Treasuries and an expectation for a lower equity risk premium going forward.  Part of this equation is the yield that various asset classes generate.

One big shift coming for the markets is a wave of Baby Boomers reaching retirement age.  It has been hypothesized that this cohort of retirees will push market valuations down over the next decade.  If that is the case then the dividends will become ever more important part of investor returns.

That does not necessarily mean that companies that currently pay dividends will be bid up.  With dividend payout ratios hovering around 30% there is plenty of room for companies to either hike or initiate a dividend.  If there is a ready cohort of investors interested in dividends then you can be pretty sure that corporate American will eventually take note.

Items mentioned above:

Dividend investing.  (Big Picture)

Evidence for a “dividend month premium.” (SSRN via CXOAG)

[repeat] Setting return expectations.  (Abnormal Returns)

Are baby boomers going to represent a headwind for US equity markets?  (FRBSF)

3Q 2011 S&P dividend report.  (S&P)

[repeat] Dividends matter.  (Abnormal Returns)

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