For the majority of the twentieth century, stable returns were prioritized in the market over growth. Dividends made up nearly half of the S&P 500 total return between 1900 and 2020, even exceeding total return in some early decades of the previous century1. However, with the proliferation of tech companies in the 1990s came a shift in priorities from dividends to growth at the same time that inflation hovered down near 3%. But as 2022 has seen the highest inflation rates in over 40 years, dividends are once again being favored. High dividend paying companies have the potential to significantly outperform the broader market.
Last year was accompanied by underperformance for the overall market, including the S&P US Aggregate Bond Index, indicating that this high inflation environment is impacting certain stocks and bonds in the same negative direction.
There are several reasons why dividends perform better in certain environments than others. Companies that offer dividends typically have well-established histories of profitability and can be referred to as having a short duration. Duration refers to the amount of time it will take, in years, for an investor of a stock or bond to be repaid their investment with that stock or bond’s cash flow2.
As such, the weighted average cash flows to shareholders of short duration stocks aligns more closely with the value of cash in the present rather than the future, therefore being less sensitive to changes in interest rates. This inverse relationship between inflation and duration helps explain why 2022 might have shaped up to be a better year for high dividend-paying companies with inflation having peaked at 9.1% in June 2022. But dividends aren’t just tools for inflationary periods; history tells us that dividends perform well with a variety of inflation rates.
Between 1900 and 2020, the S&P 500 had an average total annualized return of 9.4%, with 4% coming from dividends and 5% coming from earnings growth1. Valuation change provided a minor 0.4% overall, with variability of 15 percentage points in the positives and negatives. Earnings growth proved to be slightly less volatile, with a difference of 10 percentage points decade to decade. Dividends, on the other hand, have provided the most steady contribution to total return since 1900, varying only 4 percentage points decade to decade. Dividends have always been viewed as a modest yet steady stream of income for retirees, but the past century proves that dividends have been a steady and significant contribution to total return for any investor.
Whether an investor just needs a cushion to get through this inflationary period or is looking for consistent return from a reliable source, we believe dividends can offer a low volatility option with opportunities for capital appreciation in any environment. TrueShares Low Volatility Equity Income ETF (DIVZ) is designed to do just that. In order to weather not just this storm, but future storms and the myriad peaks and valleys that come with playing a hand in the market, dividends can be incorporated into any diversified equity portfolio.
Sources:
1 – Professor Robert J. Shiller Dataset, Yale University, Opal Capital. Data supplied by Robert Shiller, Opal Capital calculated price appreciation, dividend yield and dividend contribution. Rate expressed in percent and annualized. Index performance shown is for the S&P 500 Return Index and does not represent TrueShares fund performance. It is not possible to invest directly in an index. Performance data quoted above represents past performance and does not guarantee future results.
2 – https://www.investopedia.com/terms/d/duration.asp
Dividends are not guaranteed and can be lowered or eliminated by the issuing company.
