Does the stable dividend strategy outperform?
We compared total returns on the S&P BSE Dividend Stability Index with the BSE Sensex, Nifty and other indices to find out whether the strategy really works
By Kumar Shankar Roy | Apr 12, 2016
Some investors love buying stocks of companies who pay stable or growing dividends year after year. Followers of this stable dividend strategy will tell you how dividend stocks allow you to take advantage of the wonders of compounding by reinvesting your dividend income over time. But is this true in India?
We compared Total Returns (which include both dividends and price gains) on the S&P BSE Dividend Stability Index with the BSE Sensex, Nifty and other indices to find out.
For reference, the S&P BSE Dividend Stability Index measures the performance of the companies in the S&P BSE LargeCap index that have followed a policy of increasing or stable dividend income for at least 7 out of 9 years. The top stocks (by weightage) in this index include Infosys, HDFC Bank, ITC, HDFC, Reliance Industries, ICICI Bank, TCS, L&T, Sun Pharma and Axis Bank.
Here's how the returns compare.
In One year
The S&P BSE Dividend Stability Index has dropped by 8.37 per cent in this period, faring worse than broad benchmarks such as the Sensex which dropped by 7.91 per cent. Both large-cap indices also underperformed benchmarks with a mid-cap flavour such as BSE 200 and BSE 500 indices which were down by 6.4 to 6.5 per cent. The BSE Midcap is the best performer in this period with positive total returns of 1.8 per cent.
In Three years
The Dividend Stability index delivers 12.65 per cent, which is 50 basis points more than the Sensex (12.13 per cent). But investing in mid-caps delivered better results again. The BSE 100 gives over 13 per cent, BSE 100, 200 and 500 indices clock between 14-15 per cent in the same time period in terms of total returns. The best performer, yet again, is BSE Midcap with 21.92 per cent total returns.
In Five years
Out-performance from the Dividend Stability index is still missing, in case you are wondering. With 8.07 per cent 5-year total returns, the S&P BSE Dividend Stability Index manages to edge past the Sensex and BSE 100 (7.1-7.6 per cent) but lags the S&P BSE 200, S&P BSE 500 and S&P BSE AllCap benchmarks. Remember, the latter three indices are passive and dividend stability is essentially an active strategy, for the most part. The best index in this segment is BSE Midcap with 10.17 per cent total returns.
In Ten years
It is only over this period that the dividend stability strategy really seems to pay off. The Dividend Stability index clocks 11.45 per cent, an impressive 150 bps more than Sensex's 10.02 per cent total return. No data is available for S&P BSE 100, S&P BSE 200 and S&P BSE 500.
The S&P BSE AllCap (10.06 per cent) and S&P BSE LargeCap (9.93 per cent) give good returns but they are in line with the Sensex. The MidCap benchmark is a major under-performer with 8.6 per cent over this period.
|S&P BSE Dividend Stability Index||-8.37||12.65||8.07||11.45|
|S&P BSE SENSEX||-7.91||12.13||7.12||10.02|
|S&P BSE 100||-7.54||13.04||7.64||NA|
|S&P BSE 200||-6.44||14.24||8.15||NA|
|S&P BSE 500||-6.42||14.57||8.13||NA|
|S&P BSE AllCap||-6.34||14.81||8.17||10.06|
|S&P BSE LargeCap||-8.16||12.45||7.19||9.93|
|S&P BSE MidCap||1.8||21.91||10.77||8.6|
|S&P BSE LargeMidCap||-6.55||13.92||8.15||10.58|
As of March 31, 2016
It's time to start building your stock portfolio with great stocks at low valuations.
Our equity analyst team has sifted through hundreds of companies and selected a short list of stocks that you should invest in. This list now has 37 stocks on it. Thousands of our members are using stagnant equity markets to buy great stocks at low prices.
Membership is currently available at a 40% to 60% discount. Learn more and become a member