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Dividend Deciles
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A comparison of market returns broken out by dividend deciles highlights the impact of recency bias when evaluating investment returns.
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Dividend Deciles

As investors transition from their working years as savers to retirement spenders, the search for income has many investors focusing more on income from dividends. But as you will see, it isn't always easy to stay the course. At Miller/Howard Investments, we have focused on the high-dividend-yield stocks for more than 30 years, and we think that now may be the time for investors to refocus on the high-dividend-yielding investment universe.

Let’s look at market returns based on dividend deciles – meaning that we have sliced the market of dividend-paying stocks into 10 segments sorted by highest to lowest yield. We also look at non-dividend paying stocks as a group. This chart shows the universe of all US exchange-traded companies with a market cap over $1 billion. We use deciles 7-10 to represent the high-yield-stock universe.

The most recent average indicated yield for each dividend decile is shown on this chart.

Dividend investors have experienced a difficult five years. The top 4 deciles, or the top 40% of dividend payers, have recently underperformed lower-yielding stocks, as of December 31, 2018.

What is a little surprising is that non-dividend payers was the only group of stocks to outperform the S&P 500 Index during this 5-year period.

You see similar results when we extend the time period to 10 years. Non-dividend payers remain the only group of stocks to outperform the S&P 500, with higher-dividend payers generally underperforming.

But is this direction or distraction? Should investors conclude that high-yielding equities will persistently underperform broad market indices?

Or is this a textbook case of recency bias — when investors give outsized importance to recent events, obscuring long-term trends and cycles?

To illustrate, let’s take a look at these same charts ending in 2012 when it would have been just as easy to draw the opposite conclusion.

Again, let’s start with the 5-year chart ending on December 31, 2012. Note that 3 of the 4 highest-yielding deciles outperformed the S&P 500. The lowest-yielding decile was the worst performing group of stocks.

This is a 10-year performance chart ending on December 31, 2012. Here you can see that all four of the highest dividend deciles have outperformed the S&P 500.

Viewing the same information in a bar chart is another way to see these two time periods side by side.

Market observers will continually debate whether or not “This time is different.” But we would suggest that a key component of an investment plan should factor in full market cycles. We believe that often the best strategy is to remain patient and stay true to your initial investment thesis.

In conclusion, we believe it is important to stay on course and ignore the short-term distraction if you seek long-term dividend-paying returns.

© 2019 Miller/Howard Investments, Inc.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs, and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment, or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns — past, hypothetical, or otherwise — are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline, or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance, and investment time horizon.

Past performance does not guarantee future results.