Day 6: The Dividend Key – Dividends as Defensive Buffers

This is the final post in six part series on The Dividend Key. This final post will discuss how high dividend stocks have fared in down markets. In this study, David Dreman (Contrarian Investment Strategies in the Next Generation) looked at 27 years worth quarters where the markets were down. The results showed that stocks with the lowest price to dividend (i.e. highest yield) performed the best in these down markets compared to other value investing strategies. The chart below shows the results of his study:

Click to Enlarge

It is obvious that a value-based strategy does better in down markets than the overall market, with high yield stocks losing the least during these periods.

To sum up, we looked at a lot of data over the past 6 or so days in The Dividend Key series. This data was obtained from the excellent PDF produced by Tweedy Browne Fund Inc and should be required reading for all high schools in the world!! Here is a summary of what was covered during this series:

Day 1: Reinvested Dividends provided the bulk of equity returns
Day 2: The Real Return from stocks comes from dividends
Day 3: High Dividend Stocks do better than the market and low dividend stocks
Day 4: High Dividend Stocks are less risky
Day 5: High Dividend Stocks with low payout ratios are most effective
Day 6: High Dividend Stocks do better in down markets

I think these are all pretty strong arguments for dividend based investing. I hope you enjoyed the series!

Source: Tweedy Browne Company LLC (link opens a .pdf document)

(Photo Credit: daniel wildman)

• Day 5: The Dividend Key – High Yields and Low Payout Ratios
• The Tweedy, Browne Worldwide High Dividend Yield Value Fund and It’s Holdings
• Day 1: The Dividend Key – Reinvested Dividends
• Day 4: The Dividend Key – High Dividend Stocks and the Risk and Reward Balance
• Day 3: The Dividend Key – High Dividend Stocks