Dividends are back—again

If dividend-paying stocks are the tortoise and growth stocks are the hare, then who’s winning the race right now? It depends on your starting line. Starting from July 2024, the turtle is winning. From January 2023, it’s the rabbit. Starting from January 2022, it’s about even.

Dividend-stock returns can lag the more growth-oriented S&P 500 significantly over periods shorter than a full market cycle, but over longer-term periods, they have been consistently competitive. Several times over the last two decades, growth stock returns have surged ahead, “lapping” dividend stocks and taking the S&P 500 along with them. Several other times, dividend stocks’ “slow and steady” returns have caught up or taken the lead. Looking at 15-year returns rolling quarterly since 1970 (using data since 1955), high-dividend and low-dividend stocks both returned more than 7% (annualized) over 90% of the time. The last three years have mimicked this pattern where wide short-term return divergences diminish over longer-term periods. Typically, that takes longer to emerge, but it’s the same pattern.

High-dividend stocks are defensive, value-oriented and historically lower beta compared to the broader market, which contains many growth stocks that pay low or no dividends. In risk-on periods, when high-growth stocks are outperforming, we can expect quality high-dividend stocks to underperform (and vice versa). However, over time, high dividends can contribute substantially to total returns, and these stocks have tended to outperform during down periods. Earnings growth and valuation changes tend to contribute more to high-growth stocks’ returns, but because these are more volatile than dividends, high-growth stocks tend to experience deeper drawdowns, which take time to recover from.

Over time, their results are competitive, but the investor’s experience is very different. Quality high-dividend stocks can provide a “smoother ride” but with fewer speculative names that provide so much fun on the way up (though not on the way down). In exuberant risk-on periods, such as January 2023 to June 2024, this can frustrate or confuse dividend investors. We advise investors to take a long-term view of total returns: focus on the dividend, consider the lower downside risk and diversification benefits that dividends can provide, assess the circumstances and be patient.

The market is now more growth-oriented than it has been in the past—the S&P 500 average monthly growth exposure was 39% from January 2021 through July 2024, up from 31% in 2004-2020. Over the last three years, high-dividend stocks exhibited lower correlation to the S&P 500 than over longer time periods. The high concentration of several mega-cap growth stocks in the S&P 500 is a primary reason for the decline in correlation. Covid-19, and the fiscal and monetary response to it, is another. A shortened, three-year market cycle return pattern with temporary extreme divergences in returns was the result. This lower correlation is evidence of dividends’ ability to help diversify a stock portfolio. While past performance is no guarantee of future results, we believe quality dividend stocks will continue to offer competitive long-term returns over a full market cycle.

This is why, with valuations historically low and with high-dividend stocks underperforming by more than average over a 20-year period, we view today’s market as a chance for investors to gain the potential for high and rising income, to lower downside risk and to help diversify a stock allocation at an attractive valuation. Those who already own dividend stocks can take advantage of this opportunity by reinvesting dividends.