With risks of recession officially back in the markets, investors are likely searching for ways to protect their income and wealth. For those who rely more on passive investments than a fixed salary to fund their lifestyle, dividend-focused strategies are a good option.
But as a new commentary notes, dividend investors who focus too much on income end up missing half the story. “[D]ividends ... should not be viewed solely as a source of income, but also as a source of return,” wrote Matthew J. Bartolini, CFA and head of SPDR Americas Research. “After all, the total return calculation has two components: price and income return.”
Arguing that dividend strategies deserve to be considered for placement in more than just income-based portfolios, Bartolini pointed to the high and consistent historical contribution dividends have made to total returns. He cited the 50% contribution dividends from S&P 500 stocks have made to the index’s annualized return over the past 30 years. There’s also a tendency for dividends to consistently offer a positive contribution to total return each year — a definite plus when compared to price returns from equities that can fluctuate year over year.
“The recent negative price performance of international stocks drives home the importance of dividends in terms of total return, as it has been the only source of positive return for the MSCI World ex-US Index for the past five years,” he noted, stressing that compounding makes the effect of dividend reinvestments especially pronounced.
He also pointed to evidence showing real premiums from dividend-paying stocks. Citing research based on historical data for US-listed equities stretching back to 1949 from the Kenneth R. French Data Library, he said return streams of firms that the top 30% of stocks in terms of their dividend yield have significantly performed both the broad market defined by the Kenneth French MKT portfolio and low- to no-dividend payers.
“Dividend stocks have historically weathered market volatility better than the broader equity market,” he continued, explaining that dividends may provide some cushion to capital losses. While dividends with broad exposures have provided benefits to negative price-performing international exposures over the past five years, that effect also works in short-term periods. Looking at quarterly returns over the last 18 years, Bartolini said that dividend-focused strategies have done better than the broad S&P 500 Index during quarters when the S&P 500 has fallen.
Pointing to the S&P High Yield Dividend Aristocrats Index, which is focused on long-term dividend growth, he noted that its outperformance was even more consistent than the MSCI USA High Dividend Yield Index, which focuses on high dividend payers.
“A potential reason for this is companies focused on increasing their dividends for a long period of time tend to exhibit higher quality characteristics,” Bartolini said. “This means higher profitability, stronger balance sheets and less earnings variability—all traits that could lead to a smoother ride during market downturns.”
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