Will dividend investing reign again?

The following is adapted from Daniel Peris’ The Ownership Dividend: The Coming Paradigm Shift in the U.S. Stock Market (Routledge, 2024).

For most of its history, the U.S. stock market was largely driven by a cash relationship between companies and their owners, better known as paying dividends to shareholders. It reflected what anyone with a stake in successful business would expect: to receive their share of the profits. But following decades as the reigning strategy in the U.S., dividend-focused stock investing has been receding in popularity for more than 30 years. Today it is a boutique approach.

In its place arose a priority on near-term share price movements championed by a crop of highly successful and profitable companies, dominated by tech. Despite many of them being abundantly cash-generating, their stocks ranged from dividend-light to dividend-free, sanctioned by the new investment narrative that seemed to celebrate intentionally withholding good fortune in cash form from owners.

I believe the three main forces that drove the transition—declining interest rates, the rise of the share buyback and the emergence of Nasdaq and Silicon Valley—are either reversing or exhausted. The U.S. market appears poised to return to the more typical businesslike relationships observed in the private sector. The often hollow “financialization” of stock market activity could soon give way to a traditional, productive and transparent cash basis for capital deployment, measurement and valuation.

It’s not that market participants want this reversion. For the most part, the price-based approach has worked wonders for their retirement plans and portfolios over the last 30-plus years. And most investors under the age of 67 have lived in an environment of declining interest rates that resulted in diminishing, and then very low, cash returns from stocks. Nor will a reversal happen simply because of the volte-face in interest rates in 2022 and the resulting break of the long downtrend in risk rates.

Rather, I believe the shift back will happen because the underlying cash basis of commerce and investment is fundamental. Whether counted in strings of beads, blocks of salt, gold coins or currency, it underpins the economy and the principles of owning real estate, a private business or a publicly traded stock. Sooner or later—and probably sooner—normal business relations must reassert themselves. That is to say, I anticipate that more companies will pay larger dividends, and dividend investors will have a much larger opportunity set.

The markets have a short-term memory, and groupthink makes an investing style seem inevitable, not a choice. The current investment framework is just that, and participants now have the opportunity to prepare for the move back to a fundamental approach to trading. Typically, the best time to embrace a particular investment style is, of course, not when it is in favor, but when it is out. An even better time may be when the style is really out of favor. Risk-taking has returned over the last half year—the stock market has rocketed upward, while the S&P 500 Index’s dividend yield has been pushed back toward 1.5%. AI is the latest reason to justify an anything-goes investing climate. But it is a matter of when, not if, the paradigm will shift back to dividend-focused stock investing.