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Dividend Stocks: Driving Value in Volatile Markets

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This Markets in a Minute Chart is available as a poster.

Dividend Stocks: Driving Value in Volatile Markets

This Markets in a Minute Chart is available as a poster.

Dividend Stocks: Driving Value in Volatile Markets

When markets take a turn for the worse, dividends often can provide a buffer against the drop.

Year after year, dividend-paying companies put money into shareholders’ pockets—and may offer much needed stability during periods of high volatility. Dividend investing can help offset unexpected downturns by generating a key source of income.

In today’s Markets in a Minute chart from New York Life Investments, we explore how dividends can help lower risk within investors portfolios when markets enter turbulent territory.

The Appeal of Dividends

Over the last two decades, dividend-paying companies have outperformed the S&P 500 in 12 of 20 years, including in all five years where the S&P 500 finished the year in negative territory.

Year S&P 500 Total Return (TR)Dividend-Paying Stocks* Total Return (TR)Top performer
2000-9.1%10.1%Dividends
2001-11.9%10.8%Dividends
2002-22.1%-9.9%Dividends
200328.7%25.4%S&P 500
200410.9%15.5%Dividends
20054.9%3.7%S&P 500
200615.8%17.3%Dividends
20075.5%-2.1%S&P 500
2008-37.0%-21.9%Dividends
200926.5%26.6%Dividends
201015.1%19.4%Dividends
20112.1%8.3%Dividends
201216.0%16.9%Dividends
201332.4%32.3%S&P 500
201413.7%15.8%Dividends
20151.4%0.9%S&P 500
201612.0%11.8%S&P 500
201721.8%21.7%S&P 500
2018-4.4%-2.7%Dividends
201931.5%28.0%S&P 500

*Dividend stocks represented by S&P 500 Dividend Aristocrat Index. Past performance is no guarantee of future results.

What sets dividend-paying companies—and especially those that continually grow their dividends—apart from the herd?

Wide Moats: A Competitive Advantage

While dividend growth signals company strength, it can also indicate that the company has an economic moat—a sustainable competitive advantage. This means two things: the company can raise prices, and keep competitors at bay. For shareholders, this signals a stronger likelihood of profitability, and more sustainable dividend payouts.

Reinvested Income Fuel Returns

Between 1926 and 2018, reinvested dividend income accounted for 33% of total equity returns in the S&P 500.

While capital appreciation is an undisputed factor in building wealth, it’s easy to forget the sheer force of dividends.

Strong Balance Sheet

A company’s ability to pay steady dividends is critical. Dividends are drawn from a company’s cash balance, which must be sufficient during both strong and lackluster financial conditions.

Ultimately, this cash allocation represents a conservative and disciplined approach to the company balance sheet—demonstrating a commitment to shareholders.

“At the end of the day, dividends are not being paid with margins; dividends are paid with earnings per share.”

—Joe Kaeser

Cushion Against a Shock

When markets turn sour, income from dividend payouts can offer a key lifeline.

The ability for dividend payers to generate superior risk-adjusted returns is demonstrated across their Sharpe ratios, with a higher number indicating a more attractive risk/return profile.

For instance, between 1990-2018, The S&P 500 Dividend Aristocrat Index—a basket of stocks that have paid consistent, increasing, dividends over 25 years— averaged a Sharpe ratio of 0.7 compared to the S&P 500’s 0.4.

Alongside this, a number of dividend payers have outperformed the S&P 500 in every down year since 2000.

YearS&P 500 Total Return (TR)Dividend-Paying Stocks* Total Return (TR)
2000-9.1%10.1%
2001-11.9%10.8%
2002-22.1%-9.9%
2008-37%-21.9%
2018-4.4%-2.7%
Total Years Dividend-Paying Stocks (TR) Outperformed5

*Dividend stocks represented by S&P 500 Dividend Aristocrat Index. Past performance is no guarantee of future results.

Even during dismal years, dividend payers have shown notable returns.

A Powerful Tool in Today’s Market

As COVID-19 continues to drive further volatility in the market, dividend investing may offer investors both stability and strong income to help weather the storm.

Of course, not all dividend-payers can be expected to be winners. Careful analysis of financial statements and management track records is required to identify companies with the strongest fundamentals.

While dividend payers can help provide a shield in volatile markets, they double as a significant driver of wealth creation over time.

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Markets in a Minute

Asset Class Risk and Return Over the Last Decade (2010-2019)

Asset allocation is one of the most important decisions an investor can make. This chart shows asset class risk and return from 2010-2019.

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Asset Class Risk and Return

This Markets in a Minute Chart is available as a poster.

The Importance of Asset Classes

Asset allocation is one of the most important decisions an investor can make. In fact, studies have found that the percentage of each asset type held in a portfolio is a bigger contributor to returns than individual security selection.

However, it’s important for investors to select asset classes that align with their personal risk tolerance—which can differ based on how long they plan to hold an investment—and their targeted returns. This Markets in a Minute chart from New York Life Investments shows asset class risk and return data from 2010-2019 to highlight their different profiles.

Asset Class Risk and Return

To measure risk and return, we took annualized return and standard deviation data over the last ten years.

Annualized returns show what an investor would have earned over a timeframe if returns were compounded. It is useful because an investment’s value is dependent on the gains or losses experienced in prior time periods. For example, an investment that lost half of its value in the previous year would need to see a 100% return to break even.

Standard deviation indicates risk by measuring the amount of variation among a set of values. For example, equities have historically seen a wide range in returns, meaning they are more volatile and carry more risk. On the other hand, treasuries have typically seen a smaller range in returns, illustrating lower volatility levels.

Below is the risk and return for select asset classes from 2010-2019, organized from lowest return to highest return.

Asset ClassAnnualized ReturnAnnualized Standard Deviation
Global Commodities-5.38%16.60%
Emerging Markets Equity-0.89%16.95%
Treasury Coupons0.73%0.81%
Investment Grade Bonds3.17%2.92%
Hedge Funds4.05%5.70%
Corporate Bonds5.55%5.26%
Global Listed Private Equity5.59%18.63%
1-5yr High Yield Bonds6.71%1.00%
Global Equity6.75%12.50%
Global Equity - ESG Leaders6.87%12.03%
Taxable Municipal Bonds7.20%7.33%
Real Estate Investment Trusts8.44%11.03%
U.S. Mid Cap Equity11.00%13.60%
U.S. Large Cap Equity11.22%11.39%
Dividend-Paying Equity11.81%10.24%
U.S. Small Cap Equity11.87%14.46%

Note: See the bottom of the graphic for the specific indexes used.

Global commodities saw the lowest return over the last 10 years. Plummeting oil prices, and an equities bull market that left little demand for safe haven assets like precious metals, likely contributed to the asset class’ underperformance.

Backed by the U.S. federal government, Treasury coupons had the lowest volatility but also saw a relatively low return of 0.73%. In contrast, 1-5 year high yield bonds generated a return of 6.71% with only slightly more risk.

With the exception of emerging market equity, all selected equities had higher risk and relatively higher historical returns. Among the stocks shown, dividend-paying equity saw the highest returns relative to their risk level.

Building a Portfolio

As they consider asset class risk and return, investors should remember that historical performance does not indicate future results. In addition, the above data is somewhat limited in that it only shows performance during the recent bull market—and returns can vary in different stages of the market cycle. For example, commodities go through multi-decade periods of price ascent and decline known as super cycles.

However, historical information may help investors gauge the asset classes that are best suited to their personal goals. Whether an investor needs more stability to help save for a near-term vacation, or investments with higher return potential for retirement savings, they can build a portfolio tailored to their needs.

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Markets in a Minute

The Pyramid of Equity Returns: Almost 200 Years of U.S. Stock Performance

From 1825-2019, equities have had positive annual performance over 70% of the time. This chart shows historical U.S. stock market returns.

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historical stock market returns

This Markets in a Minute Chart is available as a poster.

Historical Stock Market Returns

After the fastest bear market drop in history, the S&P 500 rallied and now has a year-to-date total return of -4.7%. The year is not over, but in the context of history, is this in line with what’s considered a “normal” return, or is it more of an outlier?

In today’s Markets in a Minute chart from New York Life Investments, we show the distribution of U.S. equity returns over almost 200 years.

Total Returns By Year

The chart shows total annual returns, which assumes that dividends and other cash distributions are reinvested back into the index.

It’s also important to note that different indexes and data collection methods are used over the timeframe. From 1825-1925, numbers come from researchers at Yale University and Pennsylvania State University. They collected price and dividend data for almost all stocks listed on the New York Stock Exchange during its early history.

From 1926-1956, returns are from the S&P 90, the S&P 500’s predecessor. Finally, from 1957 to date, returns are based on the S&P 500.

Here are historical stock market returns by year:

YearTotal Return
18252.53%
18262.03%
18272.97%
18282.82%
18293.21%
18302.83%
18311.70%
18323.02%
18332.94%
18342.91%
18352.83%
18361.59%
18372.11%
18386.27%
18395.28%
18403.53%
18414.87%
18425.77%
18437.18%
18446.85%
18454.16%
18463.36%
18475.55%
18485.17%
18497.60%
18503.73%
18514.44%
18524.52%
18534.11%
18541.99%
18552.09%
18563.00%
18573.39%
18582.83%
18592.86%
18602.41%
18613.21%
18623.60%
18633.52%
18644.18%
18653.97%
18664.39%
18674.50%
1868-
18694.18%
18704.20%
18715.86%
18726.33%
18736.51%
18747.47%
18756.61%
18766.86%
18775.31%
18785.54%
18795.80%
18805.28%
18815.48%
18825.32%
18835.65%
18845.81%
18855.53%
18864.23%
18874.43%
18884.36%
18894.28%
18904.14%
18914.78%
18924.44%
18934.54%
18944.76%
18954.42%
18964.17%
18974.27%
18984.21%
18993.72%
19004.98%
19014.66%
19024.15%
19034.35%
19044.72%
19054.00%
19064.19%
19074.47%
19086.09%
19094.87%
19104.56%
19115.19%
19125.27%
19135.12%
19145.22%
19155.85%
19165.91%
19177.04%
19188.38%
19196.71%
19205.72%
19216.75%
19226.98%
19236.04%
19246.43%
19255.91%
192611.62%
192737.49%
192843.61%
1929-8.42%
1930-24.90%
1931-43.34%
1932-8.19%
193353.99%
1934-1.44%
193547.67%
193633.92%
1937-35.03%
193831.12%
1939-0.41%
1940-9.78%
1941-11.59%
194220.34%
194325.90%
194419.75%
194536.44%
1946-8.07%
19475.71%
19485.50%
194918.79%
195031.71%
195124.02%
195218.37%
1953-0.99%
195452.62%
195531.56%
19566.56%
1957-10.78%
195843.36%
195911.96%
19600.47%
196126.89%
1962-8.73%
196322.80%
196416.48%
196512.45%
1966-10.06%
196723.98%
196811.06%
1969-8.50%
19704.01%
197114.31%
197218.98%
1973-14.66%
1974-26.47%
197537.20%
197623.84%
1977-7.18%
19786.56%
197918.44%
198032.42%
1981-4.91%
198221.55%
198322.56%
19846.27%
198531.73%
198618.67%
19875.25%
198816.61%
198931.69%
1990-3.10%
199130.47%
19927.62%
199310.08%
19941.32%
199537.58%
199622.96%
199733.36%
199828.58%
199921.04%
2000-9.10%
2001-11.89%
2002-22.10%
200328.68%
200410.88%
20054.91%
200615.79%
20075.49%
2008-37.00%
200926.46%
201015.06%
20112.11%
201216.00%
201332.39%
201413.69%
20151.38%
201611.96%
201721.83%
2018-4.38%
201931.49%

Source: Journal of Financial Markets, Slickcharts. The year 1868 has insufficient data to estimate a total annual return.

U.S. equity returns roughly follow a bell curve, meaning that values cluster near a central peak and values farther from the average are less common. Historically, they have been skewed towards positive performance.

Here is how the distribution of returns stack up:

Total Annual Return (%)-50 to -30-30 to -10-10 to 1010 to 3030 to 5050+
Number of Years Within Range3237765225
Percent of Years Within Range1.5%11.8%39.5%33.3%11.3%2.6%

While extreme returns can happen, almost 40% of annual returns have fallen within the -10% to 10% range.

Recessions and Recoveries

What does it look like when more abnormal returns occur? Due to the cyclical nature of the economy, recessions tend to be followed by strong recoveries.

recession and recovery stock market returns

In 1957, the year the S&P 500 was created, the stock market saw a loss of almost 11%. Stock prices shot up by over 43% the following year, bolstered by rising credit volumes and business profits.

Most recently, the 2008 global financial crisis led to one of the largest equity losses to date. In 2009, stocks climbed by almost 27%, boosted by expectations of higher capital spending and demand as the economy recovered.

What History Tells Us

While equities can have high volatility, returns have historically followed a positively-skewed bell curve distribution. From 1825-2019, the average total annual return was 8.25%. In fact, over 70% of total annual returns have been positive over the same timeframe.

Owning stocks long-term may help investors not only beat inflation, but also build a nest egg that may sustain them throughout their retirement years.

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