In recent years, income-paying equities have been largely out of favour, and the preference for growth-orientated stocks, already evident before the events of 2020, has been exacerbated by the broad-based dividend cuts and suspensions which have been made amid the fallout from the Covid-19 pandemic.

Three key objections have been levelled at equity-income investing:

  • That better returns can be harnessed elsewhere in markets
  • That an income-focused approach entails missing out on growth opportunities
  • That share buybacks provide a viable alternative to dividend payments by companies.

Given these objections, and our conviction that they are largely unfounded, we are delighted to have supported the Centre for Endowment Asset Management at Cambridge Judge Business School, with which we have had a long-standing relationship, in its undertaking of research to enhance the understanding of equity-income investing.

The research addresses the three key objections set out above by asking the following questions:

  • Do dividends drive returns?
  • Does pursuing an income-focused approach necessitate a sacrificing of growth?
  • Are dividends and buybacks equally suitable ways to return income to investors?

In this article, we explain the backdrop to equity-income investing, and we summarise the findings of the research.

The research was undertaken independently by Dr David Chambers, Reader in Finance at the University of Cambridge Judge Business School, Elias Ohneberg, a PhD student at the University of Cambridge and Dr Adam Reed, Professor of Finance at UNC Kenan-Flagler Business School at the University of North Carolina and Research Fellow at Cambridge Judge Business School.

You can also read the full academic paper.

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