Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Market View

History shows that dividend-paying equities have outperformed over the long term—but chasing just the highest-yielding stocks actually has been a losing strategy.

 

In Brief

  • Investors have long realized that dividend-paying stocks provide the potential to build long-term wealth, as they have outperformed non-dividend payers during the past few decades.
  • But a one-dimensional focus on only the highest-yielding dividend stocks actually has resulted in poor performance over time.
  • We believe income investors would be better served by a strategy that incorporates a diversified selection of dividend-paying stocks featuring attractive yields and the opportunity for capital appreciation.

 

Most investors likely realize that dividends are an important component of long-term equity returns. In fact, over the past 90 years (according to data from Yale economist Robert Shiller) the difference between the price return of the S&P 500® Index and the total return of the index with dividends reinvested is 4% on an annualized basis— a manifestation of Albert Einstein’s famous maxim that “compound interest is the most powerful force in the universe.”

Yet it is not just the potential power of compounding that makes dividend-paying companies so desirable to many investors. The historical record indicates that dividend-paying stocks have delivered superior returns, with less risk, than equities that do not pay dividends (see Chart 1, left panel).

In addition, for companies with mature businesses, a history of dividends at a consistent payout ratio is often a sign of corporate strength and a demonstration of shareholder commitment—two important considerations for long-term investors. Speaking of the long term, investors who have targeted dividend-paying companies for these reasons (as opposed to just buying the highest dividend-paying stocks for the sake of income) have been rewarded over the past few decades (see Chart 1, right panel).

 

Chart 1. Dividend Payers Historically Have Outperformed—but Investors Need to Do Some Due Diligence

Source: Lord Abbett. The charts are based upon an equal-weighted geometric average of the historical total return and standard deviation of dividend-paying stocks, non-dividend paying stocks, and a subset of the top 20% stocks ranked by dividend yield in the S&P 500 ® Index for the period 12/31/1989–12/31/2018. The dividend policy and yield for each stock in the S&P 500® Index is determined monthly, based on dividends paid over the trailing 12 months. Components are reconstituted and rebalanced monthly. Dividend-paying stocks are ranked by dividend yield each month to form the top 20% grouping. The periods shown do not represent the full history of the S&P 500® Index.
The historical data are for illustrative purposes only, do not represent the performance of a specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
Past performance is not a reliable indicator or guarantee of future results.

 

Yet, despite the historical long-term benefits of dividend-paying stocks, in recent years many equity-income investors have found themselves stung by periods of rising rates. In the past three years, there have been two periods of prolonged rising rates when the 10-year U.S. Treasury yield rose by more than 100 basis points—July 8, 2016–March 13, 2017 and September 7, 2017–November 8, 2018. During these two periods, the average fund in the Lipper Equity Income Classification lagged the broader market (as measured by the S&P 500) by 3% and 7%, respectively, during very favorable markets for equities overall.

Why was this the case? For many managers, the underperformance can be explained by an overconcentration in sectors that are comprised of stocks that pay a high-dividend yield but offer very little else to investors in terms of capital appreciation. For these low- or no-growth stocks, their dividend payout is often a sizeable portion of their overall total return, so it is no surprise that they tend to underperform when a spike in interest rates makes their dividend yields relatively less attractive. Because of this return profile, these stocks are sometimes referred to as “bond proxies” and are typically found in a few common sectors/industries: utilities, telecommunications, real estate, and certain consumer staples segments. As Chart 2 highlights, these sectors were the relative laggards during recent periods of rising rates, while the broader equity market delivered respective returns of 13% and 16% to investors.

 

Chart 2. “Bond Proxies” Have Underperformed During Periods of Rising Rates
Total return by S&P 500 sector during indicated periods when the yield on the 10-year U.S. Treasury note rose 100 basis points

July 8, 2016–March 13, 2017

September 7, 2017–November 8, 2018

Source: FactSet. “Bond proxies” refer to sectors (in this case, Real Estate, Communication Services, Consumer Staples, and Utilities) containing mature, slow-growth companies that return a large portion of their earnings to shareholders when paying dividends, resulting in “bond-like” dividend yields for investors.
For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. In September 2018 GICS changed the name of the Telecommunication Services sector to Communication Services.  In addition to the name change, certain companies that were previously included in the Technology and Consumer Discretionary sectors are now included in the Communication Services sector.
Past performance is not a reliable indicator or guarantee of future results.

 

For equity income investors, it doesn’t have to be this way. While many of the highest dividend-paying companies may reside in these select bond-proxy sectors, the universe of dividend-paying equities is much broader. In fact, as illustrated below, these four sectors account for less than a quarter of all dividend-paying stocks today.

 

Chart 3. Bond Proxies Represent Less Than One-Quarter of Dividend-Paying Stocks
Percentage of all dividend-paying stocks in the Russell 1000® Index from each sector, as of December 31, 2018

Source: FactSet. Aggregate total of sector representation reflects rounding of individual percentages. “Bond proxies” refer to sectors (in this case, Real Estate, Communication Services, Consumer Staples, and Utilities) containing mature, slow-growth companies that return a large portion of their earnings to shareholders when paying dividends, resulting in “bond-like” yields for investors.
For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment and are not intended to predict or depict future results.  Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

For this reason, we believe equity income investors would be wise to consider a diversified approach to dividend-paying stocks.

Summing Up: The Appeal of Diversified Dividend Payers
While dividends have proven to be a crucial component of long-term returns, and dividend-paying equities have been shown to be long-term outperformers, a focus on just the highest dividend payers has exposed investors to more risk than they may have realized. Instead, we believe a better approach to accessing dividends may be for investors to utilize a diversified approach that focuses on uncovering the most attractive dividend payers wherever they can be found, thereby allowing their portfolios to potentially benefit from both the power of compound interest and the capital appreciation opportunity provided by higher-quality, under-valued dividend paying stocks.

 

MARKET VIEW PDF


  Market View

CONTRIBUTING STRATEGIST

Related Fund
 

Affiliated Fund

RELATED FUND
The Lord Abbett Affiliated Fund Class A invests primarily in dividend-paying stocks of large U.S. companies. Access performance and portfolio information.
image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field