The Future of Dividend-Paying Stocks: A Comeback on the Horizon
As an equity income investor, it’s been a tough road over the past year. The top 20% of dividend-paying stocks in the S&P 500 Index have lagged behind the broader market, returning only 13.5% compared to the S&P 500’s 29.9% gain in the 12 months through March.
Despite this temporary setback, I want to reassure you that there is light at the end of the tunnel. High-yielding stocks are poised for a comeback in the coming year. Historical data, market biases, mean reversion trends, and the current market conditions all suggest that these stocks are set to outperform.
Top Quintile of Dividend Yield
As of 03/31/24; Note: 1QDY or Top Quintile of Dividend Yield. Source: S&P, Bloomberg & Wealth Enhancement Group
Looking back over the last 30 years, investing in high-yielding stocks has proven to be a successful strategy. The top quintile of dividend-paying stocks in the S&P 500 has consistently outperformed the market, returning 11.9% annually compared to the S&P 500’s 10.4% return.
While these stocks may be more volatile, their Sharpe Ratio is similar to the broader market, and they offer a substantially higher dividend yield.
The Advantages of High-Yielding Stocks
High-yielding stocks are often associated with value investing, favoring stocks with lower price-to-book ratios. These top dividend-paying stocks have also outperformed the Russell 1000 Value Index over the last three decades.
While volatility may be a concern, adding a metric for dividend growth can help mitigate risk, although the focus here remains solely on yield.
Why Have High-Yielding Stocks Outperformed?
Several factors may explain the historical outperformance of high-yielding stocks. Investors seeking a steady income stream prefer dividends over capital gains. Paying dividends can also incentivize companies to allocate capital more efficiently, reducing management agency costs.
With a higher tax rate on dividends compared to capital gains, these stocks offer higher returns to investors. Additionally, focusing on a stock’s growth potential while overlooking dividends may lead to biases in investment decisions.
In the current market climate, a reversion to the mean framework suggests that high-yielding stocks are poised to bounce back. Mechanical exercises and fundamental indicators point to a potential return to historical performance levels.
Conclusion: The Future Looks Bright for Dividend-Paying Stocks
Despite recent challenges, the outlook for dividend-paying stocks is optimistic. With a focus on mean reversion, fundamental metrics, and market conditions, these stocks are primed for a resurgence.
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*Disclaimer: The opinions expressed in this post are the author’s own and should not be construed as financial advice. Views expressed do not necessarily reflect the opinions of CFA Institute or the author’s employer.
Image courtesy of Nick Webb under the Creative Commons Attribution 2.0 Generic license. (Cropped)
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