Sunday, May 08, 2011

Dividend Actions As A Forecasting Variable

One reason we review a company's actions in regards to its dividends is these actions can provide insight into the potential direction of a company's stock price. Additionally, the broader dividend actions of companies in the S&P 500 Index can provide insight into the market's future direction as well. In as much as dividends are important, it is really the insight that dividends provide into a company's future cash flow expectations and the quality of its earnings.

The below chart graphs the S&P 500 Index returns for the seven year period (2003 - 2009). Admittedly, this is a short time period and I will attempt to post an analysis of the data over a longer time period in the near future. The graph also includes the positive dividend actions within the index lagged, or pulled forward 1-year. The correlation coefficient of the two data sets is .7775. This high level of correlation suggests that an investor's ability to forecast dividend actions can have a positive impact on ones investment returns.

From The Blog of HORAN Capital Advisors

We have written a number of articles on our blog that addresses the importance of dividends and the role they play in assessing the quality of a particular company's earnings.


JH said...

Interesting analysis. A research report I created found that companies with large dividend cuts put their money to good use and beat the S&P 500 by 8% overage with a 2 year horizon.

drocto said...

See my post in response to a link to this blog in the author's article at Seeking Alpha:

Also, JH brings up an excellent point. I've seen more rigorous analysis that suggests that large increases in dividends indicate poor investment opportunities and thus lower growth.