The Great Growth Run & a Peek at Forsaken Dividend Stocks

Researchers in behavioral finance have documented the following three items:

Human beings have a nasty habit of extrapolating trends
Even worse, the longer a trend has been going on, the more likely we are to extrapolate it….
…. which is terrible because the longer a trend has gone on, the more likely it is to revert!

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Contrary to popular perception, our research has documented that the massive run in growth stocks only began in 2017. There are several slides in our brief video presentation on alternatives that make this point as well. Here’s a simple way to see it in the post-GFC context:

First bar – long-term annual return to equities since 1871
Second set of bars: returns to Value, Core, and Growth from the trough of the GFC through 2016
Third set of bars: returns to Value, Core, and Growth since the growth bubble began

Ultimately, the advantage experienced by growth investors is a fairly recent phenomenon. Particularly, when we contemplate the ruthless beating they took in 2022, when growth fell -29% while value fell less than -8%. KCR brings this up because we think it is worthwhile to draw our readers’ attention to stocks that pay high dividends – typically a subset of the value universe. Our firm went through a stretch around 2015 where we wrote prolifically about the dangers of dividend investing.

The risks we highlighted in those pieces stemmed from the suddenly sexy concept of getting equity exposure with an income feature. Back then, investors were just getting over the brutal sting of the massive correction in equities they suffered in the GFC. Wall Street “helped” investors overcome their equity anxiety by cleverly marketing dividend strategies and low volatility strategies as a veritable “free lunch.”

So successful were those marketing pitches that dividend stocks entered the biggest bubble we had seen in the asset class. No good comes from chasing the herd. Quite the contrary – going where the crowds are not is a time-tested and empirically validated method of compounding wealth.

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Over the last seven years, the situation has completely reversed: investors are piling into growth stocks and dumping dividend stocks. If you are interested in income investing, today may be one of the best times in the last 20 years. Even if you are a growth investor, there may be important information value on offer when contrasting growth stocks with high dividend stocks.

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FAQ

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Sources

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “KCR”) shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of KCR. In preparing the information, data, analyses, and opinions presented herein, KCR has obtained data, statistics, and information from sources it believes to be reliable. KCR, however, does not perform an audit or seek independent verification of any of the data, statistics, and information it receives. KCR and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.

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