Over a long history, dividend paying stocks have performed well. If dividends are not value generating, that is because they are correlated with something that is, namely earnings: Dividends are paid from earnings so firms with higher earnings have higher dividends. That is the basis of the “dividend signaling hypothesis” which says that firms increasing dividend payout are telling us they expect higher earnings in the future and those reducing dividends have concerns about future earnings prospects. So trade on dividend yield?
Well, we must have perspective. Dividends just reduce price, leaving us no better off. But there is another point: By trading just on dividend yield, one is ignoring information at one’s peril. The S&P 500 Dividend Aristocrats Index which covers 66 companies that raised their dividends every year for the past 25 years hasn’t kept pace with the broad S&P 500 over recent years (with 2022 an exception). For 2024, the S&P 500 was up 28% to December, but the Aristocrats only up 14% (Wall Street Journal, December 9, 2024). That probably is because the large technology stocks generating considerable earnings during these periods pay lower dividends. And, as low risk yields lower returns on average, that could also be because dividend stocks are relatively safe stocks.
Focus on something that matters, earnings, rather than something less than perfectly correlated with earnings.