The Investment Scientist

Dividends to the rescue in a “Great Depression”

Posted on: October 14, 2008

“This sucker could go down!”

That was what President Bush said during the recent $700 billion bailout plan meeting with congressional leaders at the White House. The market has gone down another 20% and talk of another Great Depression has filled the airwaves ever since.

If you are a listener of Jim Cramer, you would have heard his advice: Sell, sell, sell! He constantly reminds his listeners how the Dow went down 83% during the Great Depression; and never fully recovered until 1954.

Cramer forgot to account for dividends. If dividends from the Dow stocks were reinvested, then investors would have been able to recoup all losses by 1945. That’s a full nine years sooner! Think about this: what if investors held only high-dividend stocks? Would they have recovered their investments even sooner?

To find out, I examined the following four portfolios’ performance from 1929 onwards:

  1. Portfolio A: stocks with zero dividends.
  2. Portfolio B: stocks with bottom 30% dividend yields.
  3. Portfolio C: stocks with middle 40% dividend yields.
  4. Portfolio D: stocks with top 30% dividend yields.

All four portfolios peaked in August, 1929. With the exception of portfolio B, all portfolios bottomed in May, 1933. Portfolio B bottomed in June, 1933. For each of the four portfolios, the total peak-to-trough decline (drawdown) and the number months it took to recover are presented here:

Buy at the top and hold during Great Depression
Drawdown 89% 86% 85.4% 84%
Months to recover 132 154 144 44

Data source: Kenneth French Data Library

It is probably not surprising that the highest dividend-yielding portfolio D fell a little less than other portfolios. It’s striking that portfolio D recouped all losses in just three-and-a-half years – eight to nine years before other portfolios.

Why did high dividend-yield stocks performed so well?

During the Great Depression, stock prices on average fell more than 80%. Dividends fell only about 11%. (See Chart below) As Yale University professor Robert Shiller has found, historically dividend volatility was about 15% of price volatility (meaning dividend declines were a fraction of price declines in recessions.) Stable dividend payments quickly made up for losses in price.

If the price gyration makes you dizzy, focus on dividends instead. They don’t gyrate and ultimately, they will sustain your retirement.

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9 Responses to "Dividends to the rescue in a “Great Depression”"

[…] For the first 10 years of my hypothetical investment, dividends accounted for 80.4% of the total investment gain. This means that if I had invested in high dividend stocks, I would have done even better. (Also see my newsletter article, “Dividends to the rescue in a Great Depression“.) […]

[…] Top Posts Yale Endowment asset classesAll-weather portfolio: how Yale and Harvard endowments invest for bad timesRecession and stock market performanceDavid Swensen gives four-point advice to individual investorsA David Swensen lecture on asset allocation, security selection and market timingComplete list of high-dividend-yield ETFs – USIs P/E ratio a useful stock valuation measure?Dividends to the rescue in a “Great Depression” […]

[…] strategy should stand up to the stress-test of the Great Depression.  I studied the effect of dividends and the that of […]

Michael, I like your columns very much. A problem I see with this topic of dividends coming to the resue during economic downturns, is that companies may cut dividends duringhard times, and they do so without warning. Just recently (Jan 2009) GE’s announced that the $1.24 dividend would not be cut. However, the follwoing month the dividend was cut to $0.40.

An ex-post analysis of high-dividend stocks doesn’t take into account the great uncertainty we face when deciding to buy dividend-paying stocks.


A study by Robert Shiller of historical dividend changes during recessions discovers that overall dividend reduction is about 1/7 of price reduction. Still there bound to be some high dividend stocks cutting dividends by a huge percentage, the trick is to hold a well-diversified high-dividend index fund instead of single stock.

By the way, prof. Shiller put the historical price and dividend data online, you can do the research yourself

One final caveat, history may not repeat itself.

Performance: sellers must, money Since you?Convenient trade show, a reference position.The mind must, few minutes While.Classifieds For only Depression Effects, HomeOne of the When Ontario.Or ADHD Dr, wild life and.,

Is it English?

This is a topic that is cllose to my heart… Best wishes!
Exactly where are your contact details though?

Yes, I don’t share my address on the public blog. However, people can click the orange button to schedule a meeting with me.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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