Dividend Vs. Growth Investing In 3 Charts (2024)

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I recently wrote a piece about dividend investing and how different ETFs and groups of dividend growth stocks performed over the past decade. When I started assembling the data, I had a pretty good idea of what it would show me and I was forced to adjust my own thinking on several ideas. This got me thinking about what other misconceptions I might have. I decided to explore the difference between dividend investing and growth investing using several large ETFs to represent both styles.

The Data

All prices are pulled from Yahoo Finance. Return percentages for a period ending present day are calculated using the "Adjusted Close" price to account for splits and dividends. For periods not ending in the present, "Close" price is used. The standard deviation is calculated using the rolling annual percent change. Put simply, my script calculates the percent change from the price on "X" day to the price 252 days before and then calculates the standard deviation of those figures. I make all the charts in Excel and Python scripts are used to pull and assemble the data.

I chose common ETFs used to represent both dividend and growth investing that also traded through the GFC (this was restrictive in itself). The dividend ETFs are: the Vanguard High Dividend Yield ETF (VYM), the Vanguard Dividend Appreciation ETF (VIG), and the iShares Select Dividend ETF (DVY). Growth is represented by the Vanguard Small-Cap Growth ETF (VBK), the Vanguard Mid-Cap Growth ETF (VOT), the Vanguard Growth ETF (VUG), the iShares S&P Small-Cap 600 Growth ETF (IJT), the iShares Russell Mid-Cap Growth ETF (IWP), and the iShares Morningstar Large-Cap Growth ETF (JKE). Everything is compared to the iShares S&P 500 ETF (SPY) and the iShares Core Total US Bond Market ETF (AGG) for perspective.

When I say "market peak", I'll be referring to October 9th, 2007 when the S&P 500 hit its highest close before the crash. "Market bottom" is March 9th, 2009 where the S&P 500 closed at its low.

The Results

Before we really get started, I want to ask a few simple questions. Between dividend investing and growth investing, which style:

1. Performed better from the market peak?
2. Performed better from the market bottom?
3. Performed better between the two dates?
4. Had more volatility during each period?

With answers in hand, let's look at the data.

From the market peak to today, stocks have performed exceptionally well. If you went comatose in 2007 and woke up a decade later, you may have never even known the great financial crisis had occurred. The chart below is pretty incredible when you really think about it.

Nearly everything on there has 10% annualized returns or higher from the peak to today, and this is with a 50%+ drop in the indexes.

If you thought that growth would have outperformed sleepy dividend payers from the peak to today, you're right with the exception of Vanguard's midcap product. This makes sense, given the bull market we have been in was driven by cheap money, low inflation, and worldwide economic growth. It is worth noting the standard deviation. Mid-caps are definitely the more volatile, but large and small-cap are pretty similar. Here, it is pretty clear, that risk as measured by volatility does seem to translate into more reward. There are still some caveats to that, but overall it holds true.

Now, let's look at how our ETFs fared from peak to trough.

Everything got smoked, but this is where things get pretty interesting for us. Before I pulled this data, I'd have guessed that growth got clobbered compared to dividend payers. That just isn't the case. You often read that many dividend payers are the consumer staples businesses, and consumers staples represented by the SPDR sector ETF (XLP) only declined by about 30% in the crash, so this is interesting alone. This chart challenges some long-held beliefs. The worst performer, with the highest standard deviation by a lot, was DVY. Large-cap growth beat the S&P 500 and even our Vanguard high dividend yield ETF. The safest ETF, besides AGG of course, was VIG (made up of the dividend achievers), with the smallest drop and lowest standard deviation, which follows reason. Surprisingly, again, mid-cap growth was one of the riskiest with the worse returns, and small-cap didn't do too bad. More long-held beliefs get challenged.

Our final chart, from the market bottom to today, is another one to challenge conventional thinking.

Growth blows dividends out of the water, and the risk/reward narrative is mostly supported. Small-caps beat everybody else, and mid-caps edge out large-cap growth but has significantly higher volatility. Our dividend ETFs are pretty tightly clustered, and they have all underperformed SPY, but have also been less volatile.

These three charts together tell a story, and if you were like me, they challenged some of your long-held beliefs. Were your answers to the four questions above correct? If they were wrong, why were they wrong, or why did you answer that way? These are questions I've had to ask myself.

In Closing

If we were to make a data-driven decision based on what was presented here (making certain assumptions about the future), it would be hard to make a case for dividend investing. Now, before I get dragged into the street and pelted with rocks, hear me out.

Total returns are what we are after as investors; unless you want to underperform a large index. Sacrificing greater returns for lower volatility, especially in the case of a bear market, is understandable from a behavioral standpoint. But during the GFC, dividend ETFs got taken to the woodshed just like growth ETFs did and then underperformed them in the time since. Even when we account for reinvesting dividends from the market bottom to today, dividend investing has underperformed. The volatility of dividend ETFs is much lower since the crash, but for buy-to-hold types who say they never check their accounts, why would that matter?

However...

Dividend investing provides a lot of things that growth investing simply does not. For those who are retired, it is often a very necessary source of income. A conversation could be had about taxes on dividends as opposed to long-term capital gains, but that is for another day. There is also the intangible "comfort" factor as well. Even with markets getting rocked, seeing those dividends come in feels good and probably helps people keep their finger off the sell button, which is incredibly valuable. As a behavioral reinforcement, dividends can't be quantified. There are dozens of arguments for why dividend investing, especially DGI, is a solid way to allocate capital.

I understand it is easy to look back and make decisions, hindsight makes geniuses of us all. But it is worth thinking about how dividend ETFs performed next to growth ETFs during a few important periods, especially as this bull market starts developing wrinkles on the surface. I look forward to the discussion to come and am happy to provide additional data on request.

Kyle Gunn