By Craig Lazzara
During this year’s market turmoil, dividend strategies have been one of the most reliable, if not absolute, sources of relative performance. Until June 21, 2022, for example, when the S&P 500® had decreased -20.4% YTD, the The S&P 500 high dividend index (in general, the 80 highest-yielding shares of the 500) suffered a loss of only -3.7%. The S&P 500 dividend aristocrats®which focuses on dividend growth rather than absolute dividend levels, fell 14.0%, well behind its higher-yielding compatriot, but still well ahead of the market as a whole.
We have previously discussed the relative merits of dividend yield and growth strategies, suggesting that their comparative performance is analogous to the changing return on value and growth. For almost 15 years, as the S&P 500 Growth dominated the value of the S&P 500, dividend aristocrats easily outperformed the high dividend yield. In early 2022, however, the tables changed: value outpaced growth and dividend yields are well ahead of dividend growth.
In the absence of the ability to predict the future relative performance of high-dividend and dividend aristocrats (or at least the ability to accurately predict), it is natural to wonder about the results of combining the two strategies. Although the short-term advantage may change between the two indices, in the long run the performance of aristocrats on high dividends and dividends has been comparable, and the correlation between their relative returns has typically been between 0.6 and 0.7. This suggests that the co-movement of indices, while reasonably strong, is not perfect, so combining them could produce at least some diversification benefit. Figure 1 illustrates this with three sets of index combinations.
The gold curve illustrates the combinations of the S&P 500 and the S&P 500 High Dividend Index. High Dividend has had higher historical returns and more risk than the 500, so the efficient boundary between them, after some initial curvature, moves up and to the right, as all good efficient boundaries usually do. .
The blue curve is more interesting; shows combinations of the S&P 500 and the S&P 500 Dividend Aristocrats. Notice that this efficient boundary moves upward and to the left; Dividend aristocrats have historically had higher yields and have been less volatile than the S&P 500. In other words, it is a member in good standing of the class of indices that benefit from the low volatility anomaly: the tendency of stocks with below-average volatility to outperform the market together.
Most interesting of all is the green curve, which illustrates the combinations of the Dividend Aristocrats and High Dividend indices. It’s interesting because domina both the efficient borders below. The Aristocrats and High Dividend Dividend combinations have provided more profitability for the same level of risk than the combinations of any individual index with the S&P 500.
This finding implies that investors seeking dividends should not feel pressured to choose between dividend levels and dividend growth. The combination of the two strategies can potentially produce a more attractive risk / return profile than keeping it isolated..
Editor’s note: The summary peaks in this article were chosen by the editors of Seeking Alpha.