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Rethinking Dividend Strategies

During bear markets, the dividends thrown off by companies provide the cash flow required, while a total-return approach requires one to sell shares to provide the cash flow—a clear advantage of dividend-focused strategies that those who favor them are quick to point out. This blog addresses that issue specifically.

We’ll begin our discussion by pointing out that any strategy that focuses its screen on dividends is likely to result in a portfolio that pays higher dividends than a strategy that doesn’t. This is true of any strategy based on a single metric. For example, until recently, the small value fund of Dimensional Fund Advisors (DFSVX) used a single screen of price-to-book (P/B) ratio (it recently added a profitability screen).

On the other hand, Bridgeway’s small value fund (BOSVX) uses four different screens, of which P/B was just one. (Full disclosure: My firm Buckingham recommends Dimensional and Bridgeway in constructing client portfolios.)

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