Positive dividend surprises such as unexpectedly high annual rises or one-off special payouts can be a welcome boost for income hunters – and, unsurprisingly, some investors spend a lot of time trying to find them. Indeed, evidence suggests that companies that catch the market (and their shareholders) by surprise are frequently rewarded with a rising share price as a result.
We’ve talked in the past about Earnings Surprise as a source of market-beating returns. This phenomena is known as ‘Post Earnings Announcement Drift’ – and research has found that stocks that beat analyst forecasts tend to outperform the market for the next 6-12 months. This is generally attributed to the fact that analysts are slow to revise these forecasts and the market does not fully react to the information about future growth conveyed by the earnings surprises.
As it turns out, this thinking can also be applied to dividends too – and it works even better. Research by Michaely, suggests that post-dividend price drift “is distinct from and more pronounced than that following earnings surprises”. Meanwhile, Shore Capital investment strategist Gerard Lane, who’s tracked this strategy for the UK market, says “there is much more proliferation of story around earnings upgrades and downgrades”, which means there is a greater tendency by analysts to move sales and earnings numbers and less tendency to focus on the resulting dividend change.
So, how can dividend investors find these potential surprises?
Defining the Dividend Surprise Factor
The search for surprises is not difficult in theory. ShoreCap defines the ‘dividend surprise factor’ as the difference between what was forecasted 12 months ago for the forthcoming 12 months and what was actually delivered during the period on a dividend per share basis. Of course, implementing this systematically as part of a screening system is another matter - we're not aware of this being possible using another UK stock screener but we’ll be setting it up shortly as part of Stockopedia Premium.
Lane’s research suggests that the pursuit of companies that have produced dividend surprises is a strong trading strategy even in troubled times. During the 12 months to the beginning of April 2012 companies with the top 10 percent of dividend surprises returned 0.0 percent on an equal-weighted basis in capital returns versus -3.6 percent from the FTSE 350 benchmark. According to…
