Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
Investor Content Strategist
Should you seek out dividend-paying stocks to form the core of your investment portfolio? For many readers this might sound like the old growth vs value debate – do you want high growth stocks (eg US tech) or do you want shares at a reasonable price that are not trading on excess valuations and pay steady returns?
But this would be somewhat misleading – here we want to just look at dividend-payers vs stocks that do not offer dividends.
Ned Davis Research carried out a study to find out whether investors are better off in dividend stocks or non-dividend stocks.
It looked at companies in the S&P 500 between 1973 and 2024, dividing companies into two groups based on whether or not they paid a dividend during the previous 12 months. It called the two groups “dividend payers” and “dividend non-payers.”
The “dividend payers” were subdivided further into companies that kept their dividends per share steady (no change), companies that raised their dividends (dividend growers and initiators), and companies that cut or eliminated their dividends (dividend cutters or eliminators).
Without getting into the weeds of the study, the key finding was that companies that grew or initiated a dividend - dividend growers and initiators - experienced the highest returns relative to other stocks during the 1973-2024 period and with significantly less volatility. This group delivered annual average returns in excess of 10%, versus 9.2% for the Dividend Payers category, 6.75% for No Change, -0.89% for Dividend Cutters and +4.31% for Non-Payers.
While the usual disclaimer applies that past performance is not indicative of future results, the research underlines why clients are asking more about incorporating dividend stocks within their portfolios.
Why might this be?
Companies that consistently grow their dividends tend to display strong earnings growth based on solid fundamentals and consistently good execution.
But, that does not mean the highest dividend payout is best. It’s about the second derivative – the rate of change in the payout – ie whether a dividend is initiated or raised versus being unchanged, cut or even scrapped.
Wellington Management’s research into dividend stocks going back to 1930 showed that it wasn’t the highest payers that delivered the best returns. The study divided dividend-paying stocks into quintiles by level of dividend payouts – ie the top 20% of dividend payers were in the first quintile, the next 20% by payout in the second and so on. The second quintile delivered the best returns over the period looked at. This, it’s thought, is because the highest payers were not able to maintain their high payouts and therefore were more likely to be classed as what Ned Davis Research would call a Dividend Cutter.
The two studies are not linked but they do highlight that focussing on dividends is an important element to investors.
It also underlines the importance of compounding and reinvesting dividends for maximising total returns.
NDR explains that this may be particularly useful information in the current environment. . Since March, the U.S. has entered a rare weak growth, neutral inflation regime—historically the best for Dividend Payers,” it says . “This is especially Growers, who have outperformed the S&P 500 by 6.2% annually. In contrast, Non-Payers tend to lag across most regimes, especially under weak growth conditions. Only during rising growth and falling inflation have Non-Payers outperformed the broader market.”
Key Takeaways for Investors: The Pros and Cons of Dividend Stocks
Reliable Income Stream: Dividend stocks provide regular payouts, offering investors a steady income, especially valuable during market volatility or in retirement.
Sign of Financial Health: Companies that consistently pay and grow dividends often have strong balance sheets, disciplined capital allocation, and stable cash flows.
Long-Term Total Returns: Reinvested dividends significantly boost long-term returns through compounding, historically making dividend-paying stocks key contributors to equity market performance.
Dividend Cuts in Downturns: Companies may reduce or suspend dividends during economic stress or poor performance, which can hurt both income and share price. Indeed, as the NDR research shows – companies that cut perform worst – which makes picking a dividend payer no easy task.
Slower Growth Potential: Dividend-paying firms often reinvest less in expansion, which can limit capital appreciation compared to high-growth, non-dividend stocks.
Sector Concentration Risk: Dividend stocks are often clustered in mature sectors like utilities, telecoms, or financials, exposing investors to sector-specific downturns.
Examples of Dividend ETFs
Focusing on dividend growers/initiators, the SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV) owns global shares that have increased their dividend annually for at least 10 years. Largest holdings include Altria Group, Universal Corp, Verizon, APA Group and CVS Health Corp.
The Vanguard FTSE All-World High Dvd Yield UCITS ETF (VHYL) owns about 2,000 stocks with a strong US focus. Largest holdings are JPMorgan Chase & Co, Exxon Mobil, Procter & Gamble, Johnson & Johnson and Home Depot.
For a UK focus, the iShares UK Dividend UCITS ETF (IUKD) is stuffed with FTSE 100 names with the largest holdings British American Tobacco, Legal & General, Rio Tinto, Aviva and BP. The SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV) has some crossover with Legal & General the top holding, followed by Imperial Brands, Investec, Man Group and LondonMetric Property.
For an Emerging Market play, the iShares EM Dividend UCITS ETF (SEDY) offers exposure to China (24%), Brazil (24%), Indonesia (9%) and Poland (7%).