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No Quarter

•    Co-investors in dividend stocks provide potential resistance against drawdowns.
•    Without a dividend, the investor base in a stock may have less incentive to maintain a position.

Regular readers will remember the quantitative case we made concerning dividend paying stocks as a ballast in more difficult times (A Rising Interest in Dividends (November 8, 2022)). Now let’s make a more qualitative addendum… 

How often does one explicitly consider co-investors when considering an investment – or who you are investing alongside? One of the first investment considerations we are taught is “who will buy this asset after me?” – as there must be a future buyer in order to realize a gain. We may even review stock ownership filings to determine who owns the largest positions as we are told insider ownership is very important. 

But how often do we consider the incentives driving the decisions of our co-investors? Investing legend Charlie Munger famously counsels, “Invert, always invert” and perhaps we should be asking “who is likely not to sell?”

Long-term investors in a dividend paying stock have an enormous incentive not to sell, as dividend growth becomes meaningful cash flow. They are the least price sensitive owners, mostly concerned with the continuation and growth of dividend payments, and can act as a floor during drawdowns. 

Contrast this with the average investor in a no-dividend stock – they have always had to sell in order to realize a return, and every tick lower of the tape is another incentive to realize gains. We have all felt this pressure. There is no quarter, both literally and figuratively.

20230110-chart-1The chart above illustrates this point. With the exception of Utilities (an anomaly, with only one no-dividend stock in the entire sector) the average dividend paying stock outperformed no-dividend stocks in 2022. Price insensitive co-investors held the line, a trend likely to endure if this bear market continues.

Important Disclosures & Definitions

Dow Jones Industrial Average: a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indexes. 

NASDAQ 100 Index: one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. 

Russell 2000 Index: measures the performance of the small-cap segment of the US equity universe. 

S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

One may not invest directly in an index.

Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.

AAI000199 03/31/2024

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