Are dividend stocks really less volatile than growth stocks?

Are dividend stocks less volatile than growth stocks?  I read the following recently:

Typically, dividend stocks fall much less than the overall equity market as investors flock to the safety net that dividends provide.  During the recent 2000 through 2002 bear market, the DJIA, which is made up of large mature dividend-paying stocks, fell 37.85 percent while the more growth-oriented indexes like the Nasdaq and the S&P 500 fell 77.93 percent and 49.15 percent, respectively (from their highest closing values in 2000 to their lowest closing values in 2002)”

I’ll accept the above as fact.  Now that we know what happened during the bubble; what happened to the dividend stocks during the Panic of 2008?

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During the recent 2007 through 2010 bear market the DJIA fell 52 percent while the Nasdaq and S&P500 fell 53 percent and 56 percent respectively (from their highest closing values in 2007 to their lowest closing values in 2009).  Wait a minute.  Something isn’t right here.  It appears that during the Panic of 2008 the DJIA dividend stocks depreciated as much in price as much as their growth stock buddies in the Nasdaq and the S&P500.  Why can this be?

HYPOTHESIS – The puny DJIA dividend makes them behave more like growth stocks.

The DJIA’s average dividend yield in 1944 was 4.47 percent.  Today it is 2.77 percent.

What was the DJIA dividend yield in 2007 and 2009?  According to one article I read the DJIA yield in October 2007 was 2.89%  It probably approached 4 percent at the March 2009 lows, but I don’t have an exact figure.  Likewise the S&P 500 had a dividend yield of 1.81 percent in October 2007.

What does the Nasdaq yield?  The Nasdaq 100 currently yields somewhere between 0.70 percent and 0.27 percent depending on the source.

What does the S&P500 yield?  The S&P500 currently yields 1.71 percent.

The point is that the DJIA dividend yield is not much greater than the S&P500 although it is about 3 times greater than the Nasdaq.  They all declined about the same percentage in 2007-2009.

This begs the question – What was the DJIA yielding in 2000?  Was there a greater disparity amongst the three markets back when the bubble burst?  The DJIA yielded 1.4 percent in 2000.  What was the S&P500 yielding in 2000?  I’m not sure, but it was yielding 1.4 percent in 1998.  What was the Nasdaq yielding in 2000?  I can’t figure out what the Nasdaq yield was for the year 2000, but I’m guessing it was miniscule.

Now I’m scratching my head.  When the DJIA dropped 37 percent it yielded around 1.4 percent.  The S&P500 dropped 49 percent when I’m guessing it yielded maybe 1.0 to 1.2 percent (I’m accounting for index gains since 1998 and a slightly increasing divided for the index).

Something else besides strictly dividend yields must be the causation for the similarities in the percentage declines of these indexes in 2007-2009.  In my next article I will examine how some large companies yielding more than 6 percent in 2007 faired during the Panic of 2008.  Perhaps several high dividend stocks from various industries will shed some light on this mystery.

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Published in: on January 3, 2011 at 6:04 pm  Leave a Comment  

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