Following a more eventful 2020 than many advisors and clients were expecting for the asset class, dividend stocks are coming back into style.
Attribute it to low interest rates, resurgent dividend growth or both, but either way, it's safe to say payout equities are having a moment again. For income-starved clients, that's a positive.
For advisors looking to effectively deliver dividend growth to clients without the drag of selecting individual equities, there's good news as well because a pair of new benchmarks accomplish that objective. Those are the S&P U.S. Dividend Growers Index and S&P Global Ex-U.S. Dividend Growers Index.
As the names of these benchmarks imply, they focus on dividend growth stocks. To that end, the domestic index requires member firms have minimum dividend increase streaks of at least a decade while the international counterpart is a little less stringent at seven years.
Good Timing for These Benchmarks
With dividends having contributed 36% of the S&P 500's total returns since 1936, it's always a good time to discuss payouts. Moreover, it's always a good time for advisors to show income-oriented clients the way to and the advantages of long-term payout growth.
“Put simply, a company’s ability to reliably boost dividends for multiple years should be an indication of a certain amount of financial strength and discipline,” according to S&P Dow Jones Indices. “Moreover, with limited opportunities for income generation and investor concern around market volatility, dividend growers’ commitment to consistent capital return may provide a more sustainable and stable source of income, potentially with lower volatility.”
Indeed the pair of aforementioned indexes sport higher return on assets, return equity and lower annualized volatility than the broader domestic and international equity benchmarks. Obviously, those are positive traits, but adding to that, the new S&P dividend growth indexes help advisors steer clients away from potentially dangerous yield traps.
“The S&P Dividend Growers Indices attempt to avoid these yield traps by excluding the top 25% of the highest-yielding eligible companies,” adds S&P Dow Jones. “Our research shows that, on average, the highest-dividend-yielding securities have historically proven to be yield traps, having achieved their high yielding status through underperformance.”
The average trailing 12-month return for the S&P U.S. Dividend Growers Index from March 2006 through June 2021 was more than double that of a basket of high-yield stocks. The S&P Global Ex-US Dividend Growers Index delivered better than triple the returns of the highest yielders over that period.
Another benefit to consider: Over that time frame, seven members of the S&P U.S. Dividend Growers Index delivered some form of negative dividend action – cuts or suspensions. That's pretty good. It works out to about one every other year. Conversely, the highest yielders had 19 negative dividend events. For the international benchmark, 20 member firms pared or halted payouts during that span compared to 38 instances of negative dividend moves among the highest-yielding ex-US stocks.
Advisors don't have to wait to implement these indexes in client portfolios. In fact, they may already be doing so by way of a pair of well-known ETFs. The Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) follows the S&P U.S. Dividend Growers Index. VIG is the largest and one of the least expensive domestic dividend ETFs.
It's newer, international counterpart, the Vanguard International Dividend Appreciation ETF (NASDAQ:VIGI), tracks the S&P Global Ex-US Dividend Growers Index.
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