Sam Hartzmark may be the most knowledgeable person on irrational investor behavior related to dividends. Last week, he joined me on the podcast to walk through some of his research. We cover some fun topics:
- Juicing – Mutual funds purchase stocks before dividend payments to artificially increase their dividends
- The Free Dividend Fallacy – Investors tracking capital gains and dividends as separate and independent variables, which is wrong.
- Indices Ignoring Dividends – The Dow and S&P 500 are often cited as price indices (ignoring dividends), so investors treat the price change as the primary signal.
You can listen on Apple or Spotify, or watch on YouTube, and see all of Sam’s papers in the show notes.
Here are 10 dividend stats from Sam’s papers:
- Stocks in their “predicted dividend month” earn an abnormal return of 1.5% to 2.0% higher than in non-dividend months.
- Cumulative abnormal returns (CAR) begin to build roughly 45 days prior to the ex-dividend date, peaking at 1.79% on average.
- Investors are willing to pay 15-20% higher expense ratios for a fund marketed as “Income” or “Dividend Focused” compared to a total-return fund with identical holdings.
- Some mutual funds purchase stocks before dividend payments to artificially increase their dividends.
- Mutual funds that “juice” their yields (Excess Dividend Ratio > 1.38) see 6.8% higher capital inflows per year. If they juice more aggressively (Ratio > 2.0), inflows jump to 12.2% per year.
- On index ex-dividend days, news coverage is significantly more negative because reporters mistake the mechanical price drop for a negative market event.
- Mutual funds that beat the S&P 500 Price Index (the “wrong” benchmark for total return) saw an additional 0.56% inflow per month compared to funds that matched the index but had a higher total return via dividends.
- Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend-paying stocks.
- In one survey, 70% of participants (including MBA students & professionals) failed to understand that a stock price must drop by the dividend amount, viewing the payment instead as a “bonus” return.
- Measures of liquidity and demand for dividends are associated with larger price increases in the period before the ex-day (when there is no news about the dividend), and larger reversals afterwards.
