Sam Hartzmark on Dividends – Meb Faber Research

Sam Hartzmark may be the most knowledgeable person about irrational investor behavior when it comes to dividends. Last week he appeared on the podcast and explained his research. We cover some interesting topics.

• juice – Mutual funds artificially increase dividends by purchasing stocks before dividends are paid.
• Free Dividend Error – It is wrong for investors to track capital gains and dividends as separate independent variables.
• Indexes that ignore dividends – The Dow and S&P 500 are often quoted as price indices (ignoring dividends), so investors view price changes as a key signal.

You can listen on Apple or Spotify, watch on YouTube, and see all of Sam’s papers in the show notes.

Here are 10 dividend statistics from Sam’s paper.

1. Stocks in ‘dividend expected months’ earn abnormal returns that are 1.5-2.0% higher than in non-dividend months.
2. Cumulative Abnormal Return (CAR) begins to form approximately 45 days prior to the ex-dividend date and peaks at an average of 1.79%.
3. Investors are willing to pay 15-20% higher expense ratios for funds marketed as “income” or “dividend focused” compared to total return funds with the same holdings.
4. Some mutual funds purchase stocks before dividend payments to artificially increase dividends.
5. Mutual funds that “extract” returns (excess odds > 1.38) have 6.8% higher annual capital inflows. More aggressive juicing (ratio > 2.0) increases the inflow to 12.2% per year.
6. On index ex-dividend days, news coverage is much more negative because reporters mistake mechanical price declines for negative market events.
7. Mutual funds that outperformed the S&P 500 Price Index (the “wrong” benchmark for total return) had an additional 0.56% monthly inflows compared to funds that matched the index but had higher total returns through dividends.
8. Demand for dividends is systematically higher during periods of low interest rates and poor market performance, lowering the returns of dividend-paying stocks.
9. In one survey, 70% of participants (including MBA students and professionals) viewed dividends as “bonus” returns, failing to understand that stock prices must fall by the amount of dividends.
10. Measures of liquidity and demand for dividends are associated with larger price increases in the period before the ex-date (when there is no news about the dividend) and larger reversals thereafter.