Alone, the fact that domestic dividend growth is poised to notch more records this year – first-quarter data indicate as much – is good news for clients.
After all, bond yields, though rising at the hands of the Federal Reserve, are still low and rising bond yields mean declining prices. So much for the purported safety of bonds. On the other hand, with the S&P 500 down almost 8% year-to-date, clients are right to ponder how stocks are offering protection.
However, dividend growth has twofold utility in the current environment. First, dividend growth equities have established histories of beating inflation. Alone, that’s worth the price of admission, but consistent payout growers also generate less downside capture when markets slide. That’s a potent combination.
Quality Is Key
Regarding quality and performance the S&P 500 Dividend Aristocrats Index is outperforming the S&P 500 by about 500 basis points this year. Add to that, the S&P 500 Dividend Aristocrats Index is sporting nearly 600 basis points worth of annualized volatility than the S&P 500.
“Dividend growth strategies held up better than the broader market during the recent downturn,” according to ProShares research. “They have also performed well in rising markets. The key is quality—dividend growers have demonstrated hallmarks of quality like stable earnings, solid fundamentals, and strong histories of profit and growth.”
Regarding the S&P 500 Dividend Aristocrats Index, there’s a high bar for entry – just 65 companies make the cut. Stocks must have minimum dividend increase streaks of 25 years, making the strategy ideal for long-term, income-seeking clients. Not surprisingly, there are benefits to this methodology. Since inception nearly 17 years ago, the S&P 500 Dividend Aristocrats Index’s upside capture ratio is almost 92%, but its downside capture ratio is less than 81%.
In other words, there’s not a significant trade-off for embracing dividend growth and lower volatility. Consumer staples – a sector with inflation-fighting credibility – represents almost 21% of the index. Industrials and materials – a beneficiary of rising commodities prices – combine for a third of the benchmark’s sector exposure.
Clients often associate dividends and payout growth with large-cap stocks, but advisors can illuminate them to dividend opportunities among smaller stocks because payout growth is picking up among mid- and small-cap stocks.
There’s a mid-cap equivalent to the S&P 500 Dividend Aristocrats Index and there’s a payout growth answer to the widely followed Russell 2000 Index. Fortunately, the same benefits apply with smaller dividend growth stocks as they do with large-cap fares. Those include strong upside capture and reduced downside capture.
Those traits are on display in real-time as dividend growth mid- and small-cap indexes are beating non-dividend counterparts this year.
“The more uncertain the markets, the more investors may want to consider incorporating a dividend growth strategy into their portfolio to help contribute to a more resilient portfolio,” concludes ProShares.
The point: These days, clients need income and downside. The right dividend growth strategies check both boxes.
Related: Deep Dive on Quality Warranted Today