Montier has just penned a new paper titled “A Man from a Different Time”, which he begins by looking into the historical importance of dividends to stock returns (emphasis ours):
However, to those with an attention span measured in longer than milliseconds – who are few and far between, to judge from today’s markets – dividends are a vital element of return. Exhibit 2 illustrates this point graphically. Looking at the U.S. market since 1871, on a 1-year time horizon, nearly 80% of the return has been generated by fluctuations in valuation. However, as the time horizon is extended, “fundamentals” play an increasing role in return generation. For example, at a 5-year time horizon, dividend yield and dividend growth account for almost 80% of the return. …
He also includes the following remarkable statistic and chart, showing the effect of the last decade on the relative contributions of dividends vs changes in valuation (emphasis ours):
Exhibit 3 shows the contribution that dividends have made to total returns over various periods. On average, over the very long term, dividends have accounted for some 90% of total return.
Companies have been steadily hoarding more and more cash for nearly three decades. But Montier writes that in returning money to investors, not all approaches are equal:
Whilst dividends are generally raised and lowered relatively slowly, repurchases seem to be used to distribute excess earnings that are temporary in nature.
The last section of the paper explains how dividend swaps work. Montier believes that European dividends (those for the Eurostoxx 50) are currently undervalued, as they are pricing in a depression.
The whole thing makes for worthwhile reading — do check it out.