Why Dividends Are Outperforming in 2022

In investing, sometimes the “why” matters as much as the “what” and for advisors with inquisitive client bases, rest assured, being prepared to discuss the “why” is important.

That’s likely to be the case with dividends. As has been widely documented in this space, dividend stocks and funds are outperforming the broader this year and that remains the case despite an impressive rally by growth stocks – many of which don’t deliver payouts – off the July lows.

Even with that, if dividends are treated as a standalone investment, it’s beating the market in six of eight months this year. Both high dividend and payout growth strategies are exceling in 2022, delivering for income-starved clients that are looking for inflation-fighting solutions.

Compelling Dividend Data

As noted above, the 2022 tale of the tape for dividends is attractive and it’s easily conveyed to clients, which is a boon for advisors.

“Of the 123 funds we classify as dividend strategies, the average return in 2022 is -8.4%. This is 6 percentage points better than the return on the broad S&P Global BMI Index,” notes Matthew Bartolini, head of SPDR Americas research. “And 96% of funds focused only on US equities have outperformed the S&P 500 Index (-12.4%), with an average return of -5.6%. And dividend yield is the strongest source of excess returns among all other factor strategies, outpacing minimum volatility, quality, and size exposures.”

Part of the reason for payout ebullience is, pure and simple, dividends are rising and back from the dark days of the 2020 coronavirus cuts. In the first quarter, “nearly every US company in the Index (99%) increased their payments or held them steady, as dividends continued to be a reliable source of income growth for shareholders,” according to a statement issued by Janus Henderson

“Globally, first quarter dividends jumped by 11% on a headline basis to a total of $302.5bn, also a record for the seasonally quieter first three months of the year. Underlying growth was even stronger at 16.1%. Janus Henderson’s analysis shows that dividends have more than doubled since 2009, when the Index launched,” adds the research firm.

Another reason for this year’s dividend resurgence is profitability. Many dividend-paying companies are also profitable – a hallmark that was in big demand in the first six months of 2022.

“In terms of fundamental stability, there has been a preference for profitable firms. This makes sense because earnings sentiment (i.e., fundamental volatility) is waning, evidenced by downside revisions to 2022 and 2023 earnings-per-share estimates over the past few weeks,” adds Bartolini. “Dividend exposures are more likely to have firms with positive earnings-per-share, as it is highly unlikely that a majority of firms would continue to pay dividends if bottom line cash flows are negative. In fact, only 7% of the stocks within the top 100 portfolio have a negative earnings-per-share over the past 12 months, based on recent filing date, compared to 33% for the total US equity market.”

Sector Musings

Some sectors are known for steady dividend growth, others for big yields and others for not being much on dividends at all. Broadly speaking, sector/industry effect is important with dividends, but it’s not something that needs to be over-emphasized, either.

“Industry effects are still positive, but now less pronounced. Meanwhile stock selection effects are negative, illustrating how non-dividend related styles are having a more distinct impact. For both portfolios, the “dividend” factor was one of the largest contributors, followed by value, an intuitive result given the close relationship value and dividend have (excess return correlation is 81%, historically,” concludes Bartolini.

Bottom line: 2022 has brought a perfect storm of sorts for dividends with inflation, payout growth and a faltering bond market, among other factors. It’s that easy to explain.

Related: Great Timing for Dividend Resurgence