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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.