The dividend payout ratio for companies that have a history of consecutive dividend increases provides counterintuitive results.
As we’ve highlighted in Procter & Gamble and Helmerich & Payne, high payout ratios can be found to result in higher investment returns. This is in stark contrast to the view that buying a stock with a low payout ratio would garner better returns.
Below, we outline the dividend payout ratio data for 3M Co. (MMM) as provided by Value Line Investment Survey from 1982 to 2019. The data should be compelling in highlighting the point that, at least in the past, buying a stock with a high relative dividend payout ratio could boost investment returns.
1982 to 2019 Payout Ratio
Our review of the data from the chart above will compare the price performance of 3M Co. (MMM) had an individual bought the stock at the lowest closing price for the given year indicated. In this case, the lowest closing price in 1982, 1988, 1991, 2000, 2001, 2007, and 2018.
Half and Full Cycle Data
There are two perspectives that we consider when looking at the data:
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half cycle performance (high-low payout ratio & low-high payout ratio)
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full cycle performance (high-high payout ratio & low-low payout ratio)
Within the data that we have selected, we only used the lowest closing price for the given year indicated. This allows for the most conservative assessment of performance which is a better guide for future expectations. While it is is unlikely that an investor could buy the exact low, it is equally as improbable that an investor could sell at an annual high (consistently).
Cycle Returns
In general, what can be seen in the table above is that in each case, the full cycle performance (high to high & low to low) of the stock price exceeded the half cycle performance (high to low & low to high).
Within the full cycle, the average gain in the full cycle high payout ratio period (+217.03%) exceeded the average gain from the full cycle low payout ratio period (+134.76%).
We also see that the half cycle performance of 3M Co., from high-to-low payout ratio and the low-to-high payout ratio, shows the high-to-low payout ratio period averaged gains of +98.17% which is contrasted to the low-to-high payout ratio average gains of +65.39%.
Conclusion
Counterintuitive as it may seem, considering a stock with a high dividend payout ratio might be a significant leading indication of the best time to buy a stock. However, our work relies heavily on several improbable elements:
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The company has a consistent history of dividend increases through a full economic cycle (ideally more).
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The company has easily identifiable high and low payout ratio cycles.
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The future will resemble what has been seen in the past.
All of these elements have been found in quite a few of the stocks that we have run the same payout ratio numbers on in the past. However, we always operate on the assumption that these rules will be violated going forward.
Payout Ratio Studies: