Advisor Blog

We've previously written about the insurance sales scams called "Be Your Own Bank" and "Infinite Banking".  But, the recent lies produced by the salesmen hawking a similar concept under the name "Circle of Wealth" go beyond what we've seen before.

A "calculator" sent by the promoter of the scheme to insurance salesmen that he's trying to convince to use his system compares the performance of an Indexed Universal Life (IUL) policy to a hypothetical S&P 500 index fund.  Of course, the comparison is made over a very short time period that includes the 2008 stock market meltdown.  We once heard an insurance salesman claim that "if you take away the good years, the stock market really hasn't done very well."  Brilliant!  Here's a great example of that type of thinking. 

Beyond this, the "analysis" makes the following assumptions for the mythical S&P 500 index fund used in the comparison:

• Adds a 5.64% sales charge
• Adds a 1.5% "management fee"
• Assumes 100% annual turnover
• Assumes that all capital gains distributions are short-term and taxed at 28%

The truth is that anyone can purchase the Vanguard 500 Index without any sales charge and the annual expense ratio is 0.17% (less than that for share classes with larger minimum investments).  According to Morningstar, it has a 4% annual turnover ratio.  Since the fund invests in the S&P 500 index and companies very rarely spend a year or less as part of the index, most of the distributions are taxed at the advantageous long-term capital gains rate (currently a maximum of 15% - maybe going to 20% next year).

Mutual funds typically use a variety of active management techniques - stock picking, market timing and/or tactical asset allocation (overweighting the asset class or sector that they expect to perform best in the future) in an attempt to increase performance, reduce risk, or both.  In contrast, strategic asset allocation simply maintains a fixed target weight for the asset classes represented in the portfolio.  This is often described as a "buy and hold" investment philosophy and, according to much of the financial press and the salesmen pushing active management, it's outdated - "buy and hold is dead".

The Morningstar Principia database contains detailed information on the performance of the universe of 27,780 mutual funds and exchange traded funds (ETFs) as of March 31, 2012.  This makes it possible to compare the risk-adjusted performance of a globally diversified strategic asset allocation portfolio with increased exposure to value and small cap equities to the universe of funds. 

So, how many funds actually manage to outperform this terribly outdated method of portfolio management?  Surprisingly few.  To learn more, read the paper here.

"Did your portfolio return 117% over the past 10 years?  Ours did..."  That's the subject line in the email that was sent to investors by Morningstar.  It's obviously designed to grab your attention and if you have even a vague idea of the return that the S&P 500 generated over that time period, it probably worked.

According to Morningstar, "The past 10 years have been, well, complicated (to say the least).  From a long, brutal recession and fitful recovery to markets driven by fear and uncertainty, it has been a real test of any investor's mettle... which makes the simplicity and success of our strategy all the sweeter... for our flagship newsletter, Morningstar StockInvestor." 

Morningstar goes on to explain that their "tortoise portfolio" returned 123.2% and their "hare portfolio" returned 109.7% for a combined 116.5% as compared to 42.8% for the S&P 500 over the time period of 6/18/2001 through 4/1/2012.  That's actually closer to 11 years than 10 years, but I suppose that wouldn't sound as good.  If we advertised our performance in this manner, we would be in violation of SEC rules.  But, since Morningstar isn't a Registered Investment Advisor, they aren't held to the same standards.  Ignoring this, though, the performance sounds impressive - particularly when compared to the S&P 500.  But, how much risk did the portfolio take to generate this return?  We don't know because there isn't a shred of data about risk included in the advertising - no measure of beta or standard deviation anywhere.  No information about risk-adjusted return (Sharpe ratio, Treynor ratio, etc) to be found.  To call this incomplete would be a charitable description.

OK, ignoring risk (like Morningstar did), what about the return?  The numbers certainly sound good.  So, let's compare it to something we know like, oh, say - the Talis 100 portfolio, our globally diversified equity portfolio built with DFA funds.  We can't quite match the odd time period that Morningstar chose (starting 6/18/2001), but we can look at both 6/1/2001 and 7/1/2001 through 4/1/2012 - close enough.  And those numbers (adjusted for the fund expense ratios and the highest advisory fee that we charge and subject to important disclosures found here) are 145.2% and 144.4%, respectively.  I think it's fair to say that's a significantly better result.  So, how much risk did we take to get there?  Unlike Morningstar, you can visit our website and compare the standard deviation of any of our portfolio models to appropriate benchmarks.

We frequently explain to clients that all investment portfolio designs are based on a set of tradeoffs.  Brad Steiman, Vice President at DFA, in his Northern Exposure article series does very good job of explaining one of the considerations in portfolio design in the following article.

Many aspects of life require careful consideration and balancing of the tradeoffs that arise from competing demands. For example, a common lifestyle tradeoff is working longer hours versus spending more time with your family. The competing demands within this decision are the income necessary to provide a suitable quality of life for your family versus the immeasurable benefits of quality time with your family. There is no right answer, but most people understand the tradeoff and attempt to find the balance that is right for them.

Successful investing and financial planning also require balancing tradeoffs. For example, a common investment tradeoff is that of risk and return. One of the competing demands is preservation of capital versus preservation of purchasing power. The former may allow for a better night's sleep during periods of heightened uncertainty and corresponding volatility, but the latter helps ensure you'll have a comfortable bed in the future when accounting for rising prices from inflation. Once again, there is no right answer, no "optimal" solution. Understanding the tradeoffs between preserving capital and preserving purchasing power will help investors find the balance that is right for them. This balance will depend on their definition of risk and attitude towards it.

Another great article from Weston Wellington at DFA in his "Down to the Wire" column:

Equity investors around the world had a disappointing year in 2011 as thirty-seven out of forty-five markets tracked by MSCI posted negative returns. The US did well on a relative basis and was the only major market to achieve a positive total return, although the margin of victory was slim. Total return for the S&P 500 Index was 2.11%, and the positive result was a function of reinvested dividends—the index itself finished the year slightly below where it started.

Led by the excellent performance of US stocks, global equity markets posted strong returns in the quarter. Those returns, however, were not sufficient to overcome a dismal third quarter and most markets had negative returns for the year.

• Quarterly returns for the broad US market, as measured by the Russell 3000 Index, were 12.12%. Asset class returns ranged from 15.97% for small cap value stocks to 10.61% for large cap growth stocks. The strongest sectors in the quarter were energy and industrials, while the weakest one was telecommunication services. For 2011, the strongest sectors were utilities and consumer staples, while the weakest ones were financials and materials. Value outperformed growth in the quarter, but not in 2011.

• In US dollar terms, the quarterly returns for developed non-US markets were over 3%, above the historical average but far behind the US. For 2011, however, developed international markets as a whole lost over 12%. As in most of the past few quarters, there was much dispersion in performance at the individual country level. Greece, which remains at the center of Europe’s sovereign-debt woes, was by far the worst performer in the quarter and the year. At the other end of the spectrum, Ireland, the Scandinavian countries, and Australia were the top performers for the quarter.

• In US dollar terms, emerging markets gained about 4% in the quarter, in line with the historical average, but not enough to overcome their very poor performance of the third quarter. As a result, emerging markets lost almost 20% in 2011. Malaysia and other smaller emerging markets in Asia and Latin America such as Thailand and Peru posted double-digit returns in the quarter. At the other end of the spectrum, India, Turkey, and Egypt had double-digit negative returns in the quarter. 

Ron Lieber, the New York Times "Your Money" columnist and editor of its "Bucks" blog has written another good article that discusses our investment philosophy.  In Lieber's column, he discusses the "Larry Portfolio", which he has named after Larry Swedroe.  If  you're a regular reader, you know that we think highly of Swedroe's research and his publications and have recently recommended reading his latest book, The Quest For Alpha.  His portfolio design and investment philosophy are based on the same principles and research that we employ.

Lieber's column states that "the point of any long-term portfolio for the vast majority of investors is to earn whatever return you need to meet your goals while taking the least amount of risk."  It goes on to point out that "between 1970 and 2010, small-cap value stocks outearned the S&P 500 by roughly four percentage points annually", referring to the small-cap value research done by Eugene Fama and Ken French.  "For illustration purposes, he points people to the S&P 500 index, which returned about 10 percent annually between 1970 and 2010.  If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed.  Then you'd put the other 68 percent of your money in one-year Treasury bills".

If you've paid attention to our investment philosophy, you'll recognize this - a tilt toward small-cap and value stocks with risk controlled by adding high credit quality short-duration fixed income in various proportions depending upon a client's risk capacity.

Lieber also points out important caveats about this investment philosophy.  For example, it won't track the indices that most people are familiar with, like the Dow, NASDAQ, or S&P 500.  "You have to tell yourself that you are not going to have portfolio envy or listen to what Jim Cramer is saying on CNBC.  Are you willing to pay that price?"  If you are, you might "see years like 2001 when the Fama/French index gained 40.6 percent while the S&P 500 lost 11.9 percent".  Mr. Lieber also discusses how "education is the armor that protects you from emotions" and the importance of "hiring an educator - an investment advisor - who protects you from the hair-trigger impulses that position your fingers over the sell button."

Unfortunately there aren't many responsible financial journalists.  Most try to sell newspapers and magazines with dubious research (Ten stocks/mutual funds to buy now!) or sensational headlines (Financial Armageddon!).  Fortunately, there are a few that provide a balanced and reasonable point of view. 

The book entitled “The Quest For Alpha” by Larry E. Swedroe presents comprehensive evidence documenting the futility of active portfolio management by examining the quest for money managers that are capable of delivering alpha¹.  Swedroe references academic studies on mutual funds, pension plans, hedge funds, private equity/venture capital, individual investors, and behavioral finance.  He demonstrates that markets are indeed highly efficient and makes the ultimate conclusion that the only winning move is not to play the game.  Girolamo Cardana who was a sixteenth-century physician, mathematician, and quintessential Renaissance man made the same conclusion for gambling (which is quite similar to active management) when he said “The greatest advantage from gambling comes from not playing at all.”

Referenced in the book, Philip E. Tetlock, a professor of psychology, business and political science at the University of California (Berkeley) found that the so-called experts who make prediction their business – appearing as experts on television and talk radio, being quoted in the press, etc. – are no better than the proverbial chimps throwing darts.  His research indicates that it makes no difference whether forecasters are PhDs, economists, political scientists, journalists, or historians; whether they had policy experience or access to classified information; or whether they had logged many or few years of experience in their chosen line of work.  The only predictor of accuracy was fame, which was negatively correlated with accuracy.  The most famous made the worst forecasts.  All of these so-called experts seem to fall victim to hindsight and/or confirmation bias.

I strongly encourage you to read the book for the deeper discussions and supporting research that examines the dismal results of active management in its multiple forms.

1. If an asset's return is even higher than the risk adjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors are constantly seeking investments that have higher alpha.

Our portfolio model performance has been updated through June 30, 2011.  To view it, click here, read the disclosure, scroll to the bottom of the page, and click on the accept button.  The update shows model performance net of fund expenses and advisory fees for 1, 5, 10, and 20 year periods and for annual time periods.  It also shows 20 year standard deviation results for each portfolio.  Standard deviation is a common measure of portfolio risk as measured by the variability of portfolio return.

As a comparison, we show the results of benchmark indices, including the S&P 500, MSCI World ex-US, MSCI World Small Cap, MSCI World Value, Intermediate Bond, and 3 month US Treasury Bills.

Big insurance companies have extensive investment portfolios that are critical to maintaining their financial strength and that are used to support their in-force insurance policies.  Of course, they depend heavily on the investment management expertise of their portfolio managers and they hire some of the best and brightest.  While reviewing one of their reports this week, it was interesting to note how the long-term disciplined investment strategy of one large insurer was described:

• Different asset classes will perform well during different periods and the performance of any asset class during a single period cannot be predicted with reliability.
• A broadly diversified portfolio is essential to help manage portfolio risk.
• Holding high quality fixed income investments allows the portfolio to invest in higher risk assets, including equities.
• Owning Real Estate Investment Trust securities (REITs) adds both return and real diversification to the portfolio.
• Owning higher-risk assets, such as equities, in combination with fixed income, reduces overall portfolio volatility while increasing returns over time - as explained by Modern Portfolio Theory (MPT).

What struck me as particularly interesting about this description of the insurance company's portfolio managment strategy is the similarity to ours.  In fact, most of the above statements can be found in our investment philosophy.  As we often tell prospective clients, this is how large institutional investors structure portfolios.  However, it is very rarely how individual investors or retail "financial advisors" do it.  In fact, I've read a few articles over the past couple of years that claim that MPT is dead.  Hardly.  At least, not among some of the largest investors in the world.

The recent spate of bad economic news seems to have caused a sudden reversal in the average investor's appetite for risk.  Fund flows into bond mutual funds have returned to the same levels that we saw last year.  According to The Economist, "in the week ending on May 18th bond funds collectively recorded their largest inflows since late October 2010".

A couple of months ago, I was constantly hearing from people that were worried about their bond portfolios and the effect of rising interest rates, usually in response to something that they had heard on CNBC or read in the financial media.  Two things are pretty clear.  First, most investors don't really understand the relationship between bond prices and yields or what makes a bond portfolio more or less sensitive to interest rate changes.  Second, most investors don't understand the right way to use bonds in constructing a portfolio.

Bond prices and bond fund share values decline as interest rates rise.  This inverse relationship is easy to understand.  Think of it this way.  If you own a bond that pays an interest rate of x and there is a new bond issued with similar credit and term characteristics that pays an interest rate of more than x, then who would pay the same price for the bond you own that pays a lower interest rate?  The price of the bond has to be discounted to a point that the buyer would realize the same return as the newly issued bond.  Thus, the price of existing bonds falls as interest rates rise.  But, by how much?  The sensitivity of the existing bonds, or bond portfolio, to interest rates is determined by the duration (technically, the "modified duration") of the bond or portfolio.  Duration is a calculated number and it is based on many factors, but the most important is the remaining time (number of coupon payments) until maturity.  Lower duration bond or bond funds are less sensitive to interest rate changes.

As duration increases, so does the volatility of a fixed income position or portfolio.  At some point, it approaches the same level of volatility that we observe in equity portfolios.  But, and this is an important point, without the same rate of return.  So, chasing yield in the bond allocation of a balanced portfolio does two bad things - it increases risk and increases correlation with equities.  There is a good chart on page 27 of the Talis Investment Philosophy presentation that illustrates this concept. 

Credit quality also matters.  During the equity market meltdown in 2008, we saw many portfolios designed by competitors that contained allocations to high yield (aka "junk") bonds that had suffered almost as much as equities.  All the while, our fixed income portfolio was delivering positive returns, offsetting losses in equities exactly as it was designed to do. 

So, the lesson is pretty simple.  Short-term and high credit quality fixed income does a good job of dampening the volatility of a portfolio and allowing risk to be taken in asset classes with more efficient return characteristics.  How much risk is appropriate in the fixed income allocation and how it's managed are subjects for a future article.  And, what about the "bond bubble" that now seems to be forgotten with the recent round of lackluster economic news?  No doubt, most investors will be worrying about it again at some point in the future. 

One of our clients that we really appreciate recently read Joel Greenblatt's new book The Big Secret for the Small Investor.  He thought that it made some good points and asked me to read it.

He's right.  The book is written for the average investor and explains some important concepts using plain English and numerous good examples.  In my opinion, there are two really important topics that he covers very well.  First, the explanation of why the vast majority of mutual fund and professional money managers fail to beat their benchmark index.  He also provides a great explanation of why attempting to pick individual stocks using fundamental analysis is a seriously flawed method.  As an aside, Benjamin Graham - probably the most famous value investor of all time and father of fundamental analysis, admitted later in his life that most investors would be better off in an index fund.

The "big secret" that the book discusses is that a diversified portfolio of value stocks has a higher expected rate of return than the market.  If you're familiar with our investment philosophy, you already know that.  Greenblatt makes the point that more value exposure is better over long periods of time.  Right again. 

He also explains that there can be long periods of time when the value effect is absent and it's tough for most investors to stick to the strategy.  He nailed that one, too.  Then he goes off the rails and suggests that allowing for a +/-10% tactical weighting to stocks will help an investor stay the course.  He fails to mention that the value effect is very strong in markets around the world and that it occurs at different times in different markets, so a globally diversified value portfolio can be much more robust and deliver more return per unit of risk. 

He also fails in the discussion of the other factor that provides higher expected returns in an equity portfolio - exposure to small cap stocks, by dismissing it with a reference to one paper.  That's amazing, since it's very well researched and documented.  Nevertheless, the book is well worth reading for most individual investors.

Our portfolio model performance has been updated through March 31, 2011.  To view it, click here, read the disclosure, scroll to the bottom of the page, and click on the accept button.  The update shows model performance net of fund expenses and advisory fees for 1, 5, 10, and 20 year periods and for annual time periods.  It also shows 20 year standard deviation results for each portfolio.  Standard deviation is a common measure of portfolio risk as measured by the variability of portfolio return.

As a comparison, we show the results of benchmark indices, including the S&P 500, MSCI World ex-US, MSCI World Small Cap, MSCI World Value, Intermediate Bond, and 3 month US Treasury Bills. 

We've compared the performance of a strategic asset allocation portfolio model to the universe of mutual funds, many of which employ active management - including tactical asset allocation, on a regular basis since 2008.  The papers examine both pre-tax and after-tax 10 year risk-adjusted returns.  The most recent update, based on data from 26,564 mutual funds, ETFs, and holding company depository receipts is now posted on the home page of our website.  You can read it here.  If you'd like to read one of the previous versions, simply request it via email to one of our advisors.

Strategic asset allocation as an investment management policy is based on studies that have found that portfolio return is primarily determined by asset class exposure, whereas tactical asset allocation attempts to predict future returns of asset classes and weight them to increase return, reduce risk, or both.  The data presents a compelling case for strategic asset allocation and further supports the conclusions of other studies that have found that active management, including tactical asset allocation, adds no value.

The report contains performance information for a strategic asset allocation portfolio and is subject to the same disclosures as the performance information posted on our website.  Read the applicable disclosure information here.

There is a lot of mystique surrounding the hedge fund industry and many investors think that hedge funds are exclusive investment vehicles for the wealthy that somehow produce outsize return without taking on additional risk.  Financial economists would tell you that idea is ridiculous, but it certainly persists.  In fact, there seem to be plenty of people that are happy to pay the typical "2 and 20" fee that most hedge funds charge.  That means paying 2% of assets under management plus 20% of the gains (usually over a benchmark or "hurdle" rate) to the hedge fund manager. 

According to a recent article from Reuters, the hedge fund industry offered weak returns in 2010.  The article states that hedge funds, on average, returned only 4.52% through December 28.  The data is from the Hedge Fund Research HFRX index.  That certainly doesn't compare well to the market indices and pales in comparison to our portfolio results.

Another reason that investors give money to hedge fund managers, according to Gabriel Burstein, Global Head of Investment Research for Lipper, is that "they are looking for returns that do not depend on the broader market, and can therefore improve the performance of the investor's overall portfolio."  In other words, they are seeking to add an uncorrelated asset class to their portfolio.  Yet, according the article, "nearly every hedge fund strategy tended to move in synchrony with the markets and with other hedge fund strategies this year."

The Quarterly Investment Review for fourth quarter 2010 is now available. This update contains:

• Discussion of quarterly capital market behavior
• Review of significant events that occurred during the quarter
• Survey of long-term asset class performance
• Analysis of world market capitalization
• Returns of globally diversified portfolios
• Achieving market returns in 2010

I just updated our website with the portfolio performance numbers through the end of 2010. 

US stocks turned in pleasing results for the full year in 2010, with investors earning significant rewards for the equity, small cap and value risk factors.  But, capturing the market rate of return required plenty of patience: eight months into the year the S&P 500 Index was still down 5.8% and the tepid economic recovery appeared to put a lid on any significant upturn in prices.  Nevertheless, stock prices surged over the subsequent five months and the S&P 500 ended the year at 1257.64, up 12.78% (price only), recouping all of its losses since the collapse of Lehman Brothers on September 15, 2008.

Results were generally similar in non-US markets, with 37 out of 45 countries tracked by MSCI achieving positive returns in both local and US dollar terms. The US ranked 22nd in dollar terms and 23rd when expressed in local currency. Peru and Thailand vied for the top spot (up 53% and 56%, respectively) while Greece and Spain landed in the cellar.

Throughout the year, investors had no trouble finding reasons to fret about the future and remain on the sidelines:

• A prominent researcher who had predicted the Great Recession was expecting the "biggest co-ordinated asset bust ever."

• An Economist cover story in January warning of asset price bubbles asserted that US stocks were "nearly 50% overvalued."

• The "January Indicator" signaled poor stock market performance for the remainder of the year.

• A tragic drilling rig explosion in April produced a disastrous and hugely expensive oil spill in the Gulf of Mexico.

• A bewildering "flash crash" on May 6th saw the Dow Jones Industrial Average plummet over 1100 points in the course of a few frantic minutes.

• Hundreds of bank failures revealed continued weakness in the financial system.

• A divided Congress passed a complex and potentially expensive healthcare reform bill.

• Residential housing remained weak, with monthly sales of new homes falling at one point to the lowest level since tracking was initiated in 1963.

• An obscure technical indicator dubbed the "Hindenburg Omen" generated a "sell" signal in August.

• North Korea launched a deadly artillery barrage in November against South Korea's Yeonpyeong Island.

• A financial crisis with no clear solution gripped governments in Greece, Portugal and Ireland.

But, for those investors who stuck to a plan, the results were very good.  The all equity Talis 100 portfolio model achieved a 21.29% return for the year, net of our highest advisory fee.  To view the rest of our performance data and important disclosures, click here.

It is axiomatic in the world of financial economics that, in capital markets, risk and return are always related.  In fact, you will often hear that in order to create a portfolio with a higher expected rate of return, one must take additional risk.  One of my friends, who is also a client, recently told me that this seemingly obvious statement is very confusing to a lot of people.  He asked me how this could be true when a comparing a poorly diversified portfolio with a well diversified one.  And, he has a point.

The statement assumes that idiosyncratic risk in the portfolio has already been diversified away.  After that, adding to expected return requires taking more market risk.  Understanding the difference between indiosyncratic (or non-systematic) risk and market (or systematic) risk is critical to understanding this concept.  And, unless you've taken some finance courses or you're a portfolio manager (not a product salesman at a brokerage firm), you may not fully understand this.

Idiosycnratic, or non-systematic risk is risk that can be diversified away in a portfolio.  This is risk associated with individual assets.  An example would be company risk associated with an individual stock position (think Enron, for example).  If you hold just a few stocks in your portfolio, this is very signficant.  If you hold a few thousand stocks, it is so insignificant that it's close to zero.  It has been "diversified away".  The Capital Asset Pricing Model (CAPM) for which Sharpe won the Nobel Prize tells us that investors are not compensated for taking diversifiable (idiosyncratic or non-systematic) risk.  In other words, investors are only compensated for bearing market risk.

Market risk is risk that cannot be diversified away.  Rational investors eliminate all diversifiable risk for which they should not expect to be compensated.  Now, we can examine the statement that higher expected returns require taking additional risk.  The assumption is that diversifiable risk has been taken out of the equation.  Thus, tilting a portfolio toward riskier asset classes like small cap or value stocks increases the expected rate of return.  Likewise, adding less risky assets such as bonds, to the portfolio will reduce the expected rate of return.  Of course, this also reduces the overall risk in the portfolio and is used to adjust the level of portfolio risk to a level that is suitable for a client's risk tolerance, capacity, and time horizon.

The concept is better explained by the statement that, in a properly diversified portfolio, additional expected return can only be achieved by taking additional market risk.

One of our really astute clients asked me why DFA's funds do not emphasize dividend paying stocks.  It's a good question and certainly timely.  It seems that every issue of Barron's and every CNBC show has some "expert" proclaiming that, because corporate earnings have grown and stock prices have remained depressed by fear, there are extraordinary opportunities to buy stocks that pay a high dividend.

Since a dividend is a distribution of corporate earnings to shareholders, it is always accompanied by a similar reduction in the share price.  It is simply a transfer of ownership and it is a taxable event to the shareholder.  Under our current tax law, non-qualified dividends are taxable at the shareholder's ordinary income rate.  In general, dividends paid by US companies that are held for a certain period of time are qualified dividends.  Qualified dividends are taxed according to a more advantageous rate, like long-term capital gains.  So, in a taxable account, the dividend distribution actually results in realization of a gain and taxation that would not have occurred if the earnings had been retained. 

What is the difference between a dollar paid as a dividend and a dollar that is the result of a capital gain?  Ignoring taxes, not a thing.  So, why would a dollar paid as a dividend be so desirable?  It's not.  But, it turns out that stocks that pay a high dividend tend to perform better than stocks that pay no dividend or a low dividend.  Why?  Because they are value stocks. 

But, is sorting stocks by the dividend/price ratio an effective way of adding value exposure to a portfolio?  Academic research indicates that it is not.  The purpose of any scaled price ratio based sort is to produce dispersion in the returns of stocks that can then be used to select stocks with the highest return.  It turns out that the dividend/price ratio does this, but it is a weak relationship and it is statistically unreliable as compared to other methods (and even to other scaled price ratios, like earnings/price and cash flow/price).  What works the best?  According to the research, it's the book-to-market value, or BtM.  And, guess what?  That's the factor that DFA uses to define value stocks.  It's already built into our portfolios.

I saw one of those dumb Scottrade commercials last night where the founder (when he's not out flying around in his purple Scottrade helicopter) touts their "research" capability and suggests that individual investors should use it to pick stocks.  A quick Google search turns up a zillion or so websites and newsletters touting how to do that using dividends.  And, of course, you could.  But, it's unlikely that the results will be quite as spectacular as they might like you to believe.