In a low-growth environment, dividends have become more important to investors. Unlike during the high-tech boom of the 1990s, when the level of dividends was widely disregarded, today’s investors clamour for dividend-paying stocks. Lately, industries with high dividends have seen stock prices soar.

Investors are seduced by a narrative that says that high-dividend-paying stocks produce more reliable returns, act as a buffer against capital losses, and reduce portfolio volatility. But do dividend-paying stocks really improve risk-adjusted portfolio performance? And which investment strategies benefit the most from including dividend-paying stocks?

The study starts by investigating the extent to which high-dividend-paying stocks increase portfolio performance, using more than 50 years of data from 1962 to 2014.

The authors then test the effect of dividend levels on a number of investment styles. They reexamine, for example, the widely held theory that dividends are an essential component of value strategies but are of less importance to growth strategies. They also probe strategies focused on companies of a particular size—small cap, mid cap, and large cap—and assess the effect of dividend levels on the performance of each.

The authors take an in-depth look at the popular Dogs of the Dow strategy, a strategy that advocates investing in high-dividend-paying stocks and that has attracted considerable attention amid evidence that it produces excess returns. This study adds to previous ones by considering a larger sample over a longer time period.

First, portfolios of high-dividend-paying stocks have the least risk yet return over 1.5% more per year than non-dividend-paying stocks.

Second, increasing dividend exposure from none to high adds 26 bps per month to the small-cap portfolio and a substantial 43 bps per month to the mid-cap portfolio. Surprisingly, the return benefit of adding a high-dividend exposure to the large-cap portfolio is relatively limited, increasing monthly returns by only 14 bps.

Third, growth companies that pay dividends have higher returns; by increasing dividend exposure from none to high, the monthly return of the small-cap portfolio more than quadruples, increasing from 0.18% to 0.78%. This finding is surprising given that smaller growth companies are usually thought to be better off reinvesting their earnings than paying dividends. By contrast, the performance of small-cap, non-dividend-paying stocks is abysmal.

Fourth, in contrast to the previous finding, the benefits of adding dividend exposure to value stocks are limited or nonexistent.

For investors requiring income, high-dividend-paying stocks can be seen as an attractive proposition, providing not only income but also higher returns and lower risk. According to the study, the yield for high-dividend-paying stocks is 4.3%, which is roughly the minimum level of income that investors, such as retirees, currently require.

However, income-seeking investors who invest in large-cap funds might reconsider their choice given this study’s finding that adding dividend exposure has little effect on the performance of large-cap strategies.

For small-cap managers, this study suggests that traditional allocations to zero- or low-dividend-paying stocks in the hope of seeing rapid growth is not an optimal strategy. Paying a dividend seems to signal to the market that a company has attained a level of development that increases its odds of survival. This, in the eyes of investors, merits a positive rerating.

The lesson for managers of growth funds might be that they can substantially increase returns and reduce risk by investing in high-dividend-paying stocks, which might entice a different profile of investors to their funds.

Investors who previously believed that they would have to sacrifice current cash flows in exchange for future growth may realise that this is not necessarily the case. This realisation could influence how and to whom investment managers market their funds.