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Market View

A portfolio of stocks with steadily increasing dividends offers the opportunity for rising income over time with less volatility than the broader market. 

 

In Brief

  • Equity investors concerned about the recent upturn in market volatility may wish to consider adding exposure to stocks that have displayed consistent annual dividend growth over the long term.
  • Although there is no guarantee they will do so in the future, dividend growers have displayed an attractive risk-return profile compared to the broader market over the past 10 years.
  • A carefully selected portfolio of dividend-growth stocks may help investors achieve their goals of long-term return and capital appreciation with less volatility.

 

We have covered the recent recurrence of market volatility in previous Market Views. But are there specific approaches equity investors can take to mitigate volatility? Here, we’d like to spotlight a segment of the U.S. equity market that historically has experienced lower volatility than the broader stock market while offering the opportunity for rising income over time: dividend-growth stocks.

That prospect may be especially appealing today given recent market action. For the U.S. stock market, October 2018 was one of the more volatile months in recent years, with numerous intraday swings of 2% or more for the S&P 500® Index—and the big price movements continued into November.  Market volatility has ticked upward with rising rates, inflation, and global trade tensions all contributing to the instability. Chart 1 shows the substantial swings in volatility and prices for the broader U.S. stock market in October.
 

Chart 1. Another Volatile Autumn for U.S. Stocks
S&P 500 Total Return Index (right axis) and VIX Total Return Index (left axis), October 5. 2018–November 6, 2018

Source: FactSet.
The information shown is for illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.  Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.  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 a guarantee of future results.

 

While conservative investors may be looking to trim equity exposure, it is worth noting intra-year declines are typical and should be expected in most market cycles. As seen in Chart 2, since 1980 the S&P 500 has posted positive returns in 29 out of the last 38 calendar years.

 

Chart 2. U.S. Stocks’ Long-Term Strength Has Included Some Significant Declines along the Way

Source: Morningstar.

Note: The historical data are for illustrative purposes only, do not represent the performance of 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. 
Past performance is not a reliable indicator or guarantee of future results.

 

How do dividend-growth stocks factor into all this? (For our purposes, we will define dividend growers as companies in the S&P 500 or S&P 400® Index that paid a dividend and increased their yearly dividend payout for 10 consecutive years.) Because sequential dividend growers typically are high-quality companies, the prices of these securities historically have been less volatile than the market indexes. Dividend-growth stocks experienced an average of 87% downside capture in the largest peak-to-trough market declines in the last 10 years, as shown in Table 1, and during the most recent uptick in volatility delivered just 90% of the market downside in the month of October.

 

Table 1. Dividend Growers Have Outperformed in Market Declines
S&P 500 Index return and downside capture of Dividend Growers (as defined) during the 10 largest intra-year S&P 500 declines since October 10, 2007

Source: Bloomberg and Lord Abbett. Maximum intra-year declines; start dates inclusive.
1”Dividend Growers” are defined as companies in the S&P 500 Index or S&P 400 Index that have paid a dividend and increased their yearly dividend payout for 10 consecutive years.
The historical data are for illustrative purposes only, do not represent the performance of 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.
Past performance is not a reliable indicator or guarantee of future results. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

 

Those characteristics are also evident when measuring long-term return and standard deviation of dividend growers, the S&P 500 index, and a representative grouping of large-cap blend funds (see Chart 3).

 

Chart 3. High-Quality Dividend Growers Historically Have Helped Mitigate Volatility
Long-term return versus risk (standard deviation), September 30, 2008–September 30, 2018

Source: Bloomberg, S&P Dow Jones Indices, and Morningstar.
1Dividend Growers are defined as companies in the S&P 500 Index or S&P 400 Index that paid a dividend and increased their yearly dividend payout for 10 consecutive years.
2Morningstar Large Blend Category.
Past performance is not a reliable indicator or guarantee of future results. The historical data are for illustrative purposes only, do not represent the performance of 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. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

 

Companies that have raised dividends every year, through good times and bad, do not do so by accident. Such companies must have the ability to raise dividends every year, which would mean that they typically are high-quality firms with strong, growing, and stable businesses. They also have signaled the intention to raise dividends every year—a characteristic that becomes part of their corporate identity. These companies’ past history of increasing dividends even in times of economic weakness is another argument in their favor. [However, there is no assurance that they will be able to do so in future economic or market downturns.]

The consistency of income and price stability that a dividend-growth strategy may offer the potential for an investor to realize the reliable price and dividend growth of the market over long periods. Compared to the broader market, the historical performance of dividend growers may just provide the opportunity for a smoother ride for investors seeking long-term income and capital appreciation.

—Lord Abbett Product Consultant Melanie Coffin contributed to this article.

 

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RELATED FUND
The Calibrated Dividend Growth Fund invests primarily in stocks of large U.S. companies that have a history of increasing their dividends. Learn more.
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