Wharton Professor Jeremy Siegel is much revered. His students sing his praise, his books are best sellers, the press adores him. I’ve heard him speak and he is very engaging, even convincing. He is also totally wrong. About dividends. About ETFs based on dividends. Enough to lose you money.
A few years back I wrote an op-ed for the Wall Street Journal Op-Ed page about dividends. Specifically, that I hate dividends. You can read it here. Stocks trade on their prospects for earnings. Dividends are just a bribe to get you interested in slow growing companies who can’t be bothered to reinvest their earnings in something useful. In the past, when companies paid out 100% of their earnings to shareholders, well then dividends mattered. Today, no one pays 100%, so dividends have limited say in the value of a company. In fact, they sucker you in with attractive “yields” right before they consider cutting the dividend. Citigroup anyone?
as persuasive as arguments may sound, the hard evidence proves otherwise.
Sadly, to academics such as Professor Siegel, this is heresy. He was nice enough to write a letter to the editor about my piece saying that I was completely wrong. He is entitled to his opinion, of course, as I am entitled to hold a grudge. He even took a swipe at me in his March 2005 book, The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, (although he called me Arthur Kessler, nice fact checking, Professor Seagull). And I quote,
“As persuasive as Kessler’s arguments may sound, the hard evidence proves otherwise…Average returns on older firms surpassed the returns on the newer firms…Technology stocks, which pay the lowest dividends have scarcely been market beaters.”
Like, say, Apple. Don’t
bother with the book, it is backwards looking twaddle.
Since then, Professor Siegel has ventured outside of academics into the real world, helping endorse (for equity) Wisdom Tree, a family of ETFs based on his research that dividend-paying companies outperform the market. He claims he backtested his dividend algorithms and they are sure-fire winners. Hedge fund legend Michael Steinhardt also apparently back tested the algorithms and put up capital to fund WisdomTree Asset Management Inc. So did some friends of mine at RRE Investors (shh, don’t tell them I am writing this). It has been a decent investment. According to this great piece in Forbes on Jonathon Steinberg, they now have close to $5 billion in assets. Unfortunately for investors in their dividend funds, Siegel’s premise that dividend-paying stocks will outperform the market as a whole is flawed.
Here is the description of the WisdomTree Dividend Index:
A fundamentally-weighted index that defines the dividend-paying portion of the U.S. stock market. The Index measures the performance of US companies…that pay regular cash dividends….The index is dividend weighted…to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year…
So let’s see how Professor Siegel’s algorithms did in 2007, the first full year of operation. Not so good. 2007 is a year that the S&P 500 index, “The Market” by most people’s definition, gained 3.53%. Talk about a low hurdle. Widsom Tree domestic dividend funds all underperformed. Which is as kind as I can put it.
The LargeCap Dividend fund, DLN, which charged you 28 basis points for the privilege, opened 2007 at $56.64 and closed (adjusted for dividends and splits, according to Yahoo Finance) at $57.76. That’s a gain of 1.98% or almost 150 basis points below the S&P 500 index (and I'm being nice, the S&P was up 5.49% with dividends reinvested in 2007). Ouch. That would get most managers fired. And that was the BEST of the domestic funds. They all sucked wind, and four out of six lost money, as seen in the chart below.
|Wisdom Tree ETFs||01/01/07||12/31/07||Return|
|Dividend Top 100||56.57||56.22||-0.62%|
Wisdom Tree smartly diversified and created International Dividend Funds and then funds that were indexed based on earnings (now there’s an idea) and then some that mimic, well, other traditional cap weighted indexes. Some of these are doing just fine. And maybe the dividend funds will do well in 2008 (though I doubt it).
As Professor Siegel himself might say, as persuasive as dividend arguments may sound, the hard evidence proves otherwise.