When I wrote the book “All About Dividend Investing” for McGraw-Hill, I focused on two widely known benefits of dividend-paying stocks: they have outperformed over long periods of time, and high-yielding dividend-paying stocks tend to have the best performance, especially when market trends turn negative. In this article we’ll further explore the facts and figures that support these notions.
Human Nature vs. Markets
Human nature causes investors to seek safe havens when market trends turn from bull to bear, and dividend income provides a source of return that is not dependent on price return. Companies also have demonstrated increasing dividend payouts that offer a critical inflation-fighting component.
Bear Market Building Momentum
With higher interest rates, high inflation, recession, and a bear market building momentum, it’s time to renew your focus on higher-yielding dividend paying stocks. With a recession in the offing, it will pay to find those stocks that sport a high yield and high-quality fundamentals. This situation is where factor analysis comes into play. WBI has been using quantitative multi-factor models in an effort to identify the best-performing opportunities in the dividend space for over three decades.
While it can be challenging for retired investors to hold through downside volatility, it’s the cash flow provided by the dividend on which they need to focus. By selecting the highest quality stocks along with the highest yield, we feel these companies are very well positioned to stay the course and provide their dividend payouts through thick and thin. In addition, when retired investors understand the nature of investor mentality, they will note that dividend-paying stocks are usually the first to recover from loss and can provide good returns coming out of a bear market.
Indexes as the Example
While the S&P 500 Index has had quite a run fueled by Fed “Zero” interest rate policy, it has stumbled this year as the Fed has changed course and is now raising rates to fight inflation. The storyboard has been similar in each of the last three bear market downturns. The Fed raised rates leading to a recession, significant market declines, and investor losses. However, during these periods, high dividend-paying stocks have had less downside loss and better overall performance. Let’s compare the S&P 500 High Dividend Index and the S&P 500 Index and their performance over the most recent bear market periods and a few years into recovery.
Market Cycle #1 2000-2006
Many investors remember the brutal Dot com Bear Market that started in 2000 and ended in 2002. It pays to note that all three indexes declined slightly at the beginning of the downtrend. Still, as the broad market S&P 500 Index fell, the high dividend index climbed strongly into positive territory. As shown in the chart, as the S&P 500 PR (SPX) hits bottom – approximately 40% plus down in 2002 – the dividend index had good positive performance.
Data source: Cumulative Returns, Morningstar Direct, 2022. Past performance does not guarantee future results. Indices are unmanaged and cannot be invested in directly.
S&P 500 High Dividend Index performance shown is back-tested hypothetical performance which does not represent actual results and is provided for illustrative purposes. The index launched on September 21, 2015. All information prior to the launch date is back-tested, not actual performance. Please see additional disclosure regarding this back-tested performance at the end of this article.*
Market Cycle #2 2008-2014
Who could forget the Financial Crisis Bear Market that pushed most market indexes to a 50% or more loss? Yet again, higher-yielding dividend-paying stocks paved the way for better returns than the broad market indexes. During the Financial Crisis, it paid to invest in companies with the highest quality fundamentals as company defaults and bankruptcy were the “watch words” of the day.
Data source: Cumulative Returns, Morningstar Direct, 2022. Past performance does not guarantee future results. Indices are unmanaged and cannot be invested in directly.
S&P 500 High Dividend Index performance shown is back-tested hypothetical performance which does not represent actual results and is provided for illustrative purposes. The index launched on September 21, 2015. All information prior to the launch date is back-tested, not actual performance. Please see additional disclosure regarding this back-tested performance at the end of this article.*
Market Cycle #3 YTD 2022
Data source: Cumulative Returns, Morningstar Direct, 2022. Past performance does not guarantee future results. Indices are unmanaged and cannot be invested in directly.
While the S&P 500 Index on a price and total return basis (including the dividend) declined just under 20% (-17.0% PR, -16.1% TR respectively), the S&P 500 High Dividend Index has experienced a modest decline of about -2%. What comes next is anybody’s guess, but our 40-plus years of experience tells us the bear market declines we experienced this year are far from over. We expect the Fed to continue raising interest rates to fight inflation with a near-certain outcome of a U.S. Recession. Corporate earnings will come under pressure, and stock prices still elevated by historical standards will decline further. The European energy crisis will likely cause severe economic fallout across the continent this winter, putting more pressure on the global economy and financial systems.
Yet as we have seen in the past, this is when high-yielding dividend strategies tend to shine. We would expect their outperformance trend to continue to support the idea that when investing, it truly is “All About Dividend Investing”.
Unless otherwise noted, all data is sourced from Morningstar and Bloomberg.
Disclosures
*The S&P 500 High Dividend Index launched on September 21, 2015. Typically, when S&P Dow Jones Indices (S&P DJI) creates back-tested index data, S&P DJI uses actual historical constituent-level data (e.g., historical price, market capitalization, and corporate action data) in its calculations. In certain situations datapoints used to calculate S&P DJI’s indices may not be available for the entire desired period of back-tested history. In cases when actual data is not available for all relevant historical periods, S&P DJI may employ a process of using “Backward Data Assumption” (or pulling back) of data for the calculation of back-tested historical performance. “Backward Data Assumption” is a process that applies the earliest actual live data point available for an index constituent company to all prior historical instances in the index performance. For example, Backward Data Assumption inherently assumes that companies currently not involved in a specific business activity (also known as “product involvement”) were never involved historically and similarly also assumes that companies currently involved in a specific business activity were involved historically too. The Backward Data Assumption allows the hypothetical back-test to be extended over more historical years than would be feasible using only actual data.
Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices maintains the index and calculates the index levels and performance shown or discussed but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index and may not reflect the impact that material economic and market factors might have had on the index. Complete index methodology details are available at http://www.spglobal.com/spdji/en.
S&P Dow Jones Indices has performed the calculations included and adviser does not represent that the hypothetical returns would be similar to actual performance had the adviser managed the index or accounts.