Equity Income Strategies Proving Less Bad Than Broader Market in 2022

It’s understandable that advisors feel that it’s prosaic advice to embrace dividend equities and funds in rough market environments.

Prosaic as it may be, it’s also sound wisdom and that’s playing out in real time in 2022. The S&P 500 Dividend Aristocrats Index, which only holds stocks with payout increase streaks of at least 25 years, is beating the S&P 500 by more than 600 basis points year-to-date.

That’s not saying much considering the benchmark equity gauge is off 13.39% year-to-date, as of May 6, but it does confirm the viability of dividend stocks in turbulent mark environments. Additionally, it’s worth noting the Dividend Aristocrats Index is beating the e Bloomberg Barclays U.S. Aggregate Bond Index by 360 basis points.

With S&P 500 payouts growing this year, bonds slumping due to rising interest rates and inflation still high, the case for equity income remains compelling.

Examining Equity Income Opportunities

In any given year, it’s advantageous for clients to tap advisors for equity income insights, but that’s even more true in 2022 owing to lack of uniformity in terms of income strategies’ performance.

“With both bonds and equities off to a dismal start to the year and a growing chorus discussing the potential for a recession, income investors may be taking a closer look at their portfolio positioning as they digest recent performance amid rising interest rates,” notes Alerian’s Stacey Morris. “Year-to-date returns from typical income investments have been admittedly mixed, from outright strength in energy infrastructure to resilience in utilities to all-around weakness in closed-end funds.”

Another value add advisors bring to the table is helping clients understand the importance of selectivity and identifying the right strategies for dividend income. For example, energy is one of the best-performing sectors dating back to last year, getting a lift not only from rising oil prices, but from firming balance sheets and inflation-fighting credibility as well. In other words, some income strategies that are overweight energy while being underweight struggling growth sectors are holding up nicely this year.

“The benefit of having less exposure to these sectors is evident in the performance of the S-Network Sector Dividends Dogs Index (SDOGX), which is the underlying index for the ALPS Sector Dividend Dogs ETF (SDOG). SDOGX selects the five highest-yielding stocks in each sector of the S&P 500 (real estate excluded) and applies an equal weighting scheme,” adds Morris.

Practical Points of Emphasis

Fortunately for clients, advisors don’t have to stretch into exotic fare to generate income and outperform the broader market this year. Add to that, some rate-sensitive sectors are still topping the market and aggregate bond indexes.

“Rounding out the discussion, other income investments are down YTD but still outperforming the SPX. REITs tend to do well in inflationary periods as they enjoy pricing power and lease agreements with inflation adjustments, but the space has still seen some pressure this year with the rise in borrowing costs,” concludes Morris. “Dividend strategies focused on quality tend to be more defensive and have less exposure to technology, which has supported performance. With interest rates rising, bonds have not surprisingly fallen, but the benchmark bond indexes shown have still fared better than the broader market.”

Bottom line: Equity income is built for environments like these, proving boring remains beautiful.

Related: You Didn’t Forget About Infrastructure Investing, Right?