Research Articles

Dividends: Theory and Empirical Evidence

The following is an abstract. Here is a link to the full article: Dividends: Theory and Empirical Evidence.

Building on the concepts presented in our Dividends Are Different article, here we present data and observations highlighting how dividends can protect investors from inflation and market volatility. While this content is relevant to other applications, we focus on it within the context of retirement income.

When designing portfolios to provide for retirement, conventional wisdom holds that allocations to stocks generally facilitate growth that helps hedge against inflation. We agree with this notion, but try to make it more concrete by highlighting the fundamental and market-based mechanics behind this relationship.

We then look at empirical data to investigate how inflation relates to market prices, earnings, and dividends. We measure results over 25-year time periods – fairly typical horizons for retirement planning. Our findings reveal impressively strong relationships between fundamental performance and inflation, but an unsurprisingly weaker linkage between market returns and inflation.

Relative to chiseling away from a portfolio, we believe dividends provide a more direct tool to combat inflation as they avoid the layer of noise imposed by often-volatile market prices. This can be especially important when inflation surfaces as asset prices may react negatively – thereby requiring higher withdrawals when asset prices are depressed. This situation can impose permanent damage on retirement security and is why retirement researchers identify inflation as such a critical risk.