Trading techniques... buy the divi kings

During the first nine months of the pandemic, more than half of companies in the FTSE 100 chose to cut, defer, or even cancel their payouts to shareholders in order to conserve cash. In the banking sector, UK regulators (as well as those in the EU) essentially banned companies from paying dividends, a restriction that lasted for more than a year. However, since then dividends seem to have come back into fashion.

Of course, the big question is whether this is good for investors. Economic theory suggests that a firm’s decision to boost dividends should have no impact on overall share returns, as any money the shareholders receive will be balanced by the fact that a company has less money to pay down debt, put back into the business, or buy its own shares.

Some people even think a payout could signal that the company is running out of ways to reinvest money profitably (which is why technology companies tended to shun dividends). Generally, however, increasing dividends are usually seen as a sign that the company is generating plenty of cash. A study by the University of Oregon in 2014 of a sample of US equities between 2002 and 2012 found that the decision to increase quarterly dividends did lead to a higher share price in the next few days. Similarly, a 1994 study for the National Bureau of Economic Research showed that between 1964 and 1988 US shares outperformed the market by an average of 7.5% in the 12 months after they announced that they would start paying dividends. But they lagged the market by 11% in the year after announcing an end to dividend payments.