Dividends: A 400-Year-Old Practice
By Jamie Catherwood
This week we announced a new suite of dividend focused strategies available on Canvas® (Press Release).
The history of dividends stretches back four centuries to the first issuance by Dutch East India Company (VOC) management. Since then, dividends have provided meaningful income for investors, but also played an important role in identifying responsible management teams. This post provides a short overview of dividend’s long history.
FIRST DIVIDENDS: THE DUTCH EAST INDIA COMPANY
The modern stock market began in 1602 on the Amsterdam Stock Exchange when shares of the Dutch East India Company first traded. Yet, despite the company’s incredible monopoly on trade and incessant demands from shareholders, the VOC did not pay a dividend until 1610. Even still, this first dividend was paid in spices. Shareholders received “mace at a value of 75% of the nominal capital”. It was not until 1612 that the company finally paid investors a cash dividend.1
The VOC issued these first dividends in response to incessant criticism from shareholders over management’s poor allocation of capital and dividend policy. This shareholder movement stemmed from campaign of Isaac Le Maire, the world’s first short seller. Beginning in 1609, Le Maire, published a pamphlet levying three primary criticisms against VOC management: Rising debt levels preventing dividend payouts, the board’s unwillingness to hear investor complaints, and board directors “enriching themselves to the detriment of shareholders”.2
While Le Maire had a controversial relationship with the VOC, the company’s decision to issue dividends yielded a definitive victory for the short seller. Despite this temporarily satisfying shareholders, however, the pamphlets and petitions persisted. In 1622, a group of disgruntled shareholders criticized management for wasting capital:
“That route, however, does not lead through the Strait of Magellan, where they wasted the capital of the company… Each of the directors sells something [to the company] in order to maximize his profits.... But why, my dearest Gentlemen, doesn’t the company organize a public auction, why doesn’t it purchase the goods from anybody who is willing to accept the lowest price? This may save one third of the construction costs of the ships.”
– Dissenting Shareholders (1622)3
As a result, the company’s new charter in 1623 ceded increased oversight, regular audits, and a more frequent dividend payout to satisfy investors.4
DIVIDENDS & VALUATION
For financial historians, 1720 is an infamous year because of two wildly speculative manias that occurred in a matter of months: The South Sea Company & Mississippi Company Bubbles. We will not cover these episodes in detail here but suffice it to say that this period was not known for rational investment behavior. The following anecdote epitomizes this sentiment:5
“Starting on Friday, December 18, 1719, the Daily Post carried for several days an ad for an ‘extraordinary scheme for a new insurance company to be proposed’… with ‘permits to subscribe’ offered for £0.05 each. No names of projectors, nor details of the scheme were cited.”
Even though no crucial details on the company were provided (like what it did, who was involved, etc.), investors enthusiastically submitted their subscriptions:
“The sale of the ‘permits’ took place on Thursday, December 24. Two days later, this same paper had an ad which offered refunds for the ‘several hundred’ of those permits that had been sold and explained that the whole thing was a hoax designed to show how easy it was to ‘impose upon a credulous multitude’.”
Amidst all this speculative fervor, however, historical records reveal a few savvy and long-term oriented investors that recognized how dividend yields acted as a useful tool for equity valuation:6
“The main principle on which the whole science of stock-jobbing is built, viz. that the benefit of a dividend is always to be estimated according to the rate it bears to the price of the stock, because the purchaser is supposed to compare that rate with the profits he might make of money, if otherwise employed.”
- ‘Remarks on the Celebrated Calculations’ (1720)
The 19th and Early 20th Centuries
Until the 1920s Wall Street boom, investors in both the United Kingdom and United States primarily focused on dividend payments to assess the merit of a given stock. One reason for this emphasis on dividends was due to the amount of information available on companies’ finances.
In this period, investors were not privy to the level of transparency and regular reporting schedule enjoyed today. Early equity analysts had to use dividends and other limited financial information to deduce the company’s overall financial state.7
“By the late 19th and early 20th centuries, a number of benchmarks were used to analyze dividend yields. First, the dividend cover was of relevance. How protected was the dividend by earnings? For example: ‘James Book & Co (1915) offered preference shares covered five times by profits’.
Analysts adopted the same approach for equities and, quite early on, compared dividend yields with earnings yields…”
Since they were first issued in the early 1600s to now, dividends remain the same in two ways. First, they still provide a useful mechanism for returning capital to shareholders. Second, they continue to serve as important proxies for identifying strong management teams that allocate capital efficiently.
Over the last century there has been a proliferation of strategies that utilizing dividends as a key selection factor (dividend growth, dividend quality, etc.). While the types of strategies have evolved through time, the underlying notion that dividends provide investors with useful insights about companies as a whole has not changed over hundreds of years.
1 Matthijs de Jongh, ‘Shareholder Activism at the Dutch East India Company 1622-1625’, Origins of Shareholder Advocacy, (2010)
2 Oscar Gelderblom, Abe de Jong, Joost Jonker, An Admiralty for Asia: Isaac Le Maire and Conflicting Conceptions About the Corporate Governance of the VOC (2010)
3 De Jongh, ‘Shareholder Activism’
4 L. O. Petram, ‘The World’s First Stock Exchange: How the Amsterdam Market for Dutch East India Company Shares Became a Modern Securities Market’ (2011)
5 Andrew Odlyzko, ‘An Undertaking of Great Advantage, But Nobody to Know What It Is’, MOAF (Winter 2020)
6 Janette Rutterford, From Dividend Yield to Discounted Cash Flow: A History of UK and US Equity Valuation Techniques (2007)
GENERAL LEGAL DISCLOSURES & HYPOTHETICAL AND/OR BACKTESTED RESULTS DISCLAIMER
The material contained herein is intended as a general market commentary. Opinions expressed herein are solely those of O’Shaughnessy Asset Management, LLC and may differ from those of your broker or investment firm.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by O’Shaughnessy Asset Management, LLC), or any non-investment related content, made reference to directly or indirectly in this piece will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this piece serves as the receipt of, or as a substitute for, personalized investment advice from O’Shaughnessy Asset Management, LLC. Any individual account performance information reflects the reinvestment of dividends (to the extent applicable), and is net of applicable transaction fees, O’Shaughnessy Asset Management, LLC’s investment management fee (if debited directly from the account), and any other related account expenses. Account information has been compiled solely by O’Shaughnessy Asset Management, LLC, has not been independently verified, and does not reflect the impact of taxes on non-qualified accounts. In preparing this report, O’Shaughnessy Asset Management, LLC has relied upon information provided by the account custodian. Please defer to formal tax documents received from the account custodian for cost basis and tax reporting purposes. Please remember to contact O’Shaughnessy Asset Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, or modify any reasonable restrictions to our investment advisory services. Please Note: Unless you advise, in writing, to the contrary, we will assume that there are no restrictions on our services, other than to manage the account in accordance with your designated investment objective. Please Also Note: Please compare this statement with account statements received from the account custodian. The account custodian does not verify the accuracy of the advisory fee calculation. Please advise us if you have not been receiving monthly statements from the account custodian. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. O’Shaughnessy Asset Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the O’Shaughnessy Asset Management, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request
The risk-free rate used in the calculation of Sortino, Sharpe, and Treynor ratios is 5%, consistently applied across time
The universe of All Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflation-adjusted market capitalization greater than $200 million as of most recent year-end. The universe of Large Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflation-adjusted market capitalization greater than the universe average as of most recent year-end. The stocks are equally weighted and generally rebalanced annually
Hypothetical performance results shown on the preceding pages are backtested and do not represent the performance of any account managed by OSAM, but were achieved by means of the retroactive application of each of the previously referenced models, certain aspects of which may have been designed with the benefit of hindsight
The hypothetical backtested performance does not represent the results of actual trading using client assets nor decision-making during the period and does not and is not intended to indicate the past performance or future performance of any account or investment strategy managed by OSAM. If actual accounts had been managed throughout the period, ongoing research might have resulted in changes to the strategy which might have altered returns. The performance of any account or investment strategy managed by OSAM will differ from the hypothetical backtested performance results for each factor shown herein for a number of reasons, including without limitation the following:
- Although OSAM may consider from time to time one or more of the factors noted herein in managing any account, it may not consider all or any of such factors. OSAM may (and will) from time to time consider factors in addition to those noted herein in managing any account.
- OSAM may rebalance an account more frequently or less frequently than annually and at times other than presented herein.
- OSAM may from time to time manage an account by using non-quantitative, subjective investment management methodologies in conjunction with the application of factors.
- The hypothetical backtested performance results assume full investment, whereas an account managed by OSAM may have a positive cash position upon rebalance. Had the hypothetical backtested performance results included a positive cash position, the results would have been different and generally would have been lower.
- The hypothetical backtested performance results for each factor do not reflect any transaction costs of buying and selling securities, investment management fees (including without limitation management fees and performance fees), custody and other costs, or taxes – all of which would be incurred by an investor in any account managed by OSAM. If such costs and fees were reflected, the hypothetical backtested performance results would be lower.
- The hypothetical performance does not reflect the reinvestment of dividends and distributions therefrom, interest, capital gains and withholding taxes.
- Accounts managed by OSAM are subject to additions and redemptions of assets under management, which may positively or negatively affect performance depending generally upon the timing of such events in relation to the market’s direction.
- Simulated returns may be dependent on the market and economic conditions that existed during the period. Future market or economic conditions can adversely affect the returns.
Please Note: Socially Responsible Investing Limitations. Socially Responsible Investing involves the incorporation of Environmental, Social and Governance considerations into the investment due diligence process (“ESG). There are potential limitations associated with allocating a portion of an investment portfolio in ESG securities (i.e., securities that have a mandate to avoid, when possible, investments in such products as alcohol, tobacco, firearms, oil drilling, gambling, etc.). The number of these securities may be limited when compared to those that do not maintain such a mandate. ESG securities could underperform broad market indices. Investors must accept these limitations, including potential for underperformance. Correspondingly, the number of ESG mutual funds and exchange traded funds are few when compared to those that do not maintain such a mandate. As with any type of investment (including any investment and/or investment strategies recommended and/or undertaken by OSAM), there can be no assurance that investment in ESG securities or funds will be profitable, or prove successful.