In a draft of the upcoming Ownership Dividend, I make the point in a parallel fashion: “Dividend payments dampen total return volatility of individual investments because a portion of a stock’s annual total return appears steadily and more or less predictably. The absence of those regular payments leaves investors entirely dependent on the whims of the market and other investors. The difference between the two experiences is crystal clear in the stock market over the past three decades. High-dividend paying securities have a much lower standard deviation—a smoother ride—than the dividend free-stock-price-only roller coaster rides. The gap has narrowed in the recent decade as investors got used to dividend-free stocks as investments rather than speculations. There are times, however, such as the first half of 2022, when the stock price chart is down and to the right, sharply for many of the darlings of the prior five years. This is not to suggest that dividend-paying stocks can’t sell off dramatically, but the non-paying companies do seem more prone to hitting big air pockets. The question is whether the volatility gap will return to its normal level in the decades ahead. I believe it will.
I suppose it depends on what you want. Traders and hedge fund will prefer the wild ride. Retirees investing through the stock market should, all other factors held equal, prefer the coupon-clipping, coupon-growing experience.
I appreciate the comment, the enthusiasm, & the logic. Perhaps the return pattern of 2022 will get some of the more vocal retirement pundits to highlight the constructive role of dividend income as opposed to expecting to harvest just capital gains and sell principal.