Notes from the Observatory: Does ETF Dividend Growth Predict Market Price Performance?

An investor may profit by buying an index ETF with a high rate of growth in payout of dividends.

I’m interested to know of other studies that may confirm or deny these findings.

We took a casual sample of 31 index-based ETFs at March 31, 2016. We measured the annual rate of growth in dividends by an exponential least-squares fitting of the dividends over the latest 20 calendar quarters. We found a relatively high positive correlation (R^2=0.20, P=0.01) for the dividend growth rate with subsequent price performance for the three months from March 31 to June 30, 2016.

An earlier sample of 11 index-based ETFs at December 31, 2015 showed similar results over the six months from December 31 to June 30, 2016.

Both samples contained real estate ETFs and broad-market ETFs. When we separated out the real estate ETFs, we found the correlations much stronger for both subsets, as might be expected.

Weaknesses of this little study include little care taken to construct randomized samples, samples of small size, short time spans for price performance measurement, and cursory prior search of the literature.