Alright dividend investors, just have a seat. The Dividend Prince is here, and today, I’m gonna let you in on a secret. A secret so straightforward, so… boring… that most of the financial advisers out there probably scoff at it while they’re busy drawing complicated charts that look like a toddler attacked a whiteboard.
But here’s the kicker: this dead-simple strategy? It’s quietly been one of the most profitable ways to invest in dividend stocks for decades. Yeah, you heard me. Decades.
I’ll be honest. When I first started my dividend journey, I was like a kid in a candy store with too much allowance. I chased everything. Dividend Aristocrats? You bet. Complex screening criteria that needed a PhD in mathematics to understand? Guilty. I had spreadsheets with more tabs than a browser during a research rabbit hole. My eyes bled, my brain ached, and my returns? Well, they were… okay. Just okay.
I thought, “This is what serious investing is, right? It has to be complicated to work!”
Wrong. So, so wrong.
It took me a while, a few painful lessons (like that one time I bought a super-high yielder just before it crashed, ouch, still stings!), and a lot of digging to realize something profound: sometimes, the most powerful moves are the simplest ones.
And then I stumbled upon research, some of it highlighted by folks like Ed Clissold at Ned Davis Research and Savita Subramanian at Bank of America, and it was like a lightbulb exploded in my head. You know Ned Davis Research? They’re a big name, and some of their older work actually fanned the flames of the whole “dividend growers are king” obsession. But guess what? Their newer methodologies, looking at data since 1973, showed something fascinating: the top half of dividend-yielding stocks actually beat the dividend growers in both bull AND bear markets!
Hold on, what?! All that chasing of companies that religiously hike their dividend by a penny… and all this time, a simpler way to invest was actually getting better results?
The “Steady Eddie” Strategy That Crushes It
So, what is this magical, yet mind-numbingly simple strategy? Bank of America’s Savita Subramanian spilled the beans, and it’s so unsexy, it’s beautiful.
You take all the big, dividend-paying stocks. You line ’em up and sort them by their dividend yield, from highest to lowest. Then, you divide them into five buckets, or “quintiles.”
Now, here’s where it gets interesting. You DON’T just grab the stocks in the very top bucket, the ones with the absolute highest, often too-good-to-be-true yields. Why? Because, as I learned the hard way, those can be “dividend traps” or “dogs.” Think of companies like Walgreens before things went south; a super high yield can sometimes be a warning sign of trouble brewing, or a payout ratio that’s stretched thinner than my patience at a timeshare presentation. A company paying out 75% of its earnings as dividends (like some of those top-quintile stocks do on average) doesn’t leave much room for error or growth, does it? If earnings drop, that dividend is first on the chopping block.
Instead, Savita’s “Steady Eddie” approach says: buy the stocks in the second-highest bucket of yielders. The second quintile.
That’s it. No complex algorithms. No crystal ball. You can practically get this data for free off the internet and run it yourself.
“But Mourad,” I hear you cry, “that sounds TOO easy! Can it really be that good?”
Well, let me hit you with some numbers that made my jaw drop. According to Hartford Funds, if you’d invested $1,000 in the S&P 500 (or its predecessor) back in 1930, by the end of last year, you’d have a cool $8.6 million. Not bad, right?
But if you’d put that same $1,000 into this “second quintile of yielders” strategy?
You’d be sitting on $31 MILLION.
Let that sink in. Thirty. One. Million. From a strategy so simple, it’s almost embarrassing.
This isn’t a typo, investors. This “boring” strategy outperformed, and it did so significantly over the long haul. Wellington Management’s research, looking back over nine decades, found that these second-quintile stocks outperformed the S&P 500 Index in seven out of ten decades! The highest yielders? They only beat the index 60% of the time, same as the third quintile. Turns out, a little less yield can mean a lot more sustainable (and profitable) returns. The second quintile stocks? Their average payout ratio is a much more comfortable 40%. Makes sense, right?
What About Those Famous Dividend Growers?
Now, I know what some of you are thinking. “But Mourad, what about the Dividend Aristocrats? The companies that grow their dividends year after year? Aren’t they the gold standard?”
And look, dividend growers are great. That same Ned Davis Research shows that “dividend growers and initiators” (from 1973-2024) delivered fantastic returns (around 10.24% annually) with lower volatility than the overall market. That’s solid. Companies that consistently grow dividends often have strong fundamentals. No argument there.
But the most profitable strategy, points back to focusing on yield, specifically, that top half, and even more specifically, that “second quintile” sweet spot. It’s simpler to identify and, based on that staggering $31 million figure, potentially even more lucrative.
Think about it: identifying true, sustainable long-term growers takes a lot of work. You’ve got to analyze management, competitive advantages, future prospects… it’s a deep dive. The second-quintile yield strategy? It’s almost mechanical.
Is There Anything Even Better? (Keeping it Real)
Now, full transparency: can you potentially do even better? Maybe. Meb Faber, another smart cookie in the investing world, champions a concept called “shareholder yield.” This looks at the total cash returned to shareholders, dividends, PLUS stock buybacks, PLUS net debt reduction. The Cambria Shareholder Yield ETF apparently topped a whole universe of buyback and dividend funds. And there’s a good argument for it, especially in taxable accounts, because buybacks can be more tax-efficient than dividends (just ask Berkshire Hathaway, which hasn’t paid a dividend in nearly 60 years and has done… well, you know).
But “shareholder yield” adds another layer of analysis. It’s a great concept, for sure, but we’re talking about the simplest path to potentially massive profits today. And that “second quintile” strategy? It’s a champion of elegant simplicity.
Why This Matters Now More Than Ever
Dividends aren’t just some dusty old concept. They’ve historically been a HUGE part of total stock market returns, like 85% of the S&P 500’s cumulative total return since 1960 if you reinvested them! And right now? Corporations are sitting on mountains of cash. Payout ratios (how much of their earnings companies pay out as dividends) are actually near record lows, meaning there’s plenty of room for those dividends to grow or be maintained.
So, what’s the takeaway here? Stop overcomplicating things! You don’t need to be a Wall Street wizard to build serious wealth with dividends. Sometimes, the most profound insights are hidden in plain sight, disguised as “too simple” or “too boring.”
That’s it for today! If you found this post helpful, subscribe to my newsletter or visit my website for more valuable content on stock and dividend investing. You can explore tools for dividend investors in the Resources/Tools section!
Disclaimer: The content shared here is for general information and learning, not as a direct guide for your specific investment choices. I always recommend doing your own thorough homework and/or chatting with a qualified financial advisor before you decide on any investment moves.
Leave a Reply