Author: Special contributor, Matt Bell
The first half of 2022 featured the worst returns for equities since 1970, and has understandably left many investors reflecting on past investment decisions and contemplating how they can best position their portfolios for both the remainder of 2022 and the years to follow. The title of this article will seem ridiculous to some. After all, dividends are a common cash-for-stock tactic for firms to reward their shareholders by redirecting a portion of corporate revenues into the pockets of investors. Dividends can be traced back to the 17th century, when the Dutch East India Company began paying a dividend[1] ranging between 12% and 40% to its shareholders. Why suddenly declare their reemergence in the year 2022?
It is no secret that dividend-paying stocks have generally become less popular among investors in recent years. As I’m sure you are aware, there are two ways in which investors can receive returns on their investments: capital appreciation, by which the price of their fungible shares of a company increases, and dividend income, by which a company declares its intention to pay a certain dividend for each share held by investors, typically on a quarterly basis. Appreciation and dividends combine to make up an investment’s total return. Since the initial outbreak of the pandemic, investors have been much more focused on gaining return on their investments by way of capital appreciation. From the outbreak of the pandemic in 2020 up until the first quarter of 2022, greed was the prevailing emotion driving markets, with investors giddy to buy growth darlings such as the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) and other innovative names. The FAANG companies’ relevance in the lives of American consumers cannot be understated. Oh, and not to mention that each of their returns has dwarfed that of the S&P 500 index over the last 10 years. What’s there not to love? Unfortunately, 2022 has not been kind to these sorts of companies, with the tech-heavy NASDAQ down about 22% YTD compared to the 14% decline of the S&P 500 YTD. Cathie Wood, who was hailed by some as the oracle of innovation investing in recent years, has seen her Ark Innovation ETF (ARKK) decline by about 53% YTD. Those who once clamored for these investments, seeking high-powered growth, are realizing the volatility that accompanies owning them. In times of market turmoil and rising interest rates, debt-ridden companies lacking consistent cash flows whose valuations are highly dependent on future earnings expectations will always be among the hardest hit.
With all major market indices near bear market territory, marked by a 20% decline off recent highs, where can investors seek refuge for their portfolios? Look no further than the very stocks paying reliable dividends that greedy investors shunned during previous bull markets. Whereas share prices can be highly volatile and at the mercy of day-to-day swings in investor sentiment (think Benjamin Graham’s “Mr. Market” analogy[2]), dividends are typically an ironclad source of return for investors. In fact, according to Ben Snider, senior equity strategist at Goldman Sachs, throughout the 12 US recessions since World War II, the median decline in dividends paid by S&P 500 companies was just 1%[3]. Dividend payouts are just about as untouchable as the price of a Costco hot dog[4].
Dividend-paying stocks also offer unique advantages in rising interest rate environments. The Federal Reserve has increased their benchmark rate four times in 2022 in an effort to curb inflation. Currently, the yield on the U.S. 10-Year Treasury Note sits around 3.4% (more than doubling YTD), a similar yield to that of popular dividend-focused ETF’s such as Vanguard’s High Dividend Yield ETF (VYM). This convergence of yields may lead some investors to question the advantage of dividend payments over the ultra-safe interest payments of US treasuries. It is important to recognize that higher inflation rates and the higher interest rates that ensue will drive down bond prices and will be particularly damaging to high-duration bonds with longer maturities. Meanwhile, dividend-paying stocks offer a degree of inflation protection because not only can companies’ share prices rise over time, but companies that pay dividends also tend to increase their dividends payments over time.
If there is any silver lining provided by the current bear market, perhaps it will be that this period of decline will usher in the resurgence of dividend investing, a “dawn of dividends” if you will. After all, dividends are not just a safe haven for investors to resort to only in the most tumultuous of markets. From 1960 to 2019, dividends accounted for 33% of the S&P 500’s total return[5]. Our team of advisors understands the value of acting as all-weather money managers for clients, creating portfolios that help clients continue to meet their financial goals across a broad range of market conditions. As a result, we remain steadfast in accommodating client portfolios with high-quality dividend paying stocks based on client needs, providing clients with a comfortable stream of income and impressive risk-adjusted returns in a year that has been uniquely challenging to many investors.
[1] Dividends dataset.tab – Harvard Dataverse
[2] Mr. Market Definition and History (investopedia.com)
[3] Dividend Stocks Can Help During Recession. Here’s What to Look For. | Barron’s (barrons.com)
[4] The $1.50 Costco Hot Dog Combo That Defies Inflation – WSJ
[5] The Rising Importance of Dividends When Earnings Slow – Indexology® Blog | S&P Dow Jones Indices (indexologyblog.com)
