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Dividend Stocks: Driving Value in Volatile Markets

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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

The Top Sources Americans Use to Make Investment Decisions (2001-2019)

Americans rely on business professionals the most when making investment decisions, but the internet has become increasingly important.

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How People Make Investment Decisions

When you’re making investment decisions, there can be a lot of different things to consider. Which types of asset classes should you hold? How much risk are you comfortable with? How much will you need to retire?

It’s no surprise, then, that few Americans make these decisions on their own. This Markets in a Minute from New York Life Investments shows which sources of information families rely on for investment decisions, and how their popularity has changed over time.

The Main Sources of Investment Information Over Time

According to data from the U.S. Federal Reserve Survey of Consumer Finances, here is the percentage of families who reported using each source.

Source200120102019
Business professionals49%57%57%
Internet15%33%45%
Friends, relatives, associates36%40%44%
Advertisements and media27%26%20%
Calling around19%16%13%
Other15%8%9%
Does not invest9%12%8%

Other consists of nine options: don’t shop, material from work, past experience, personal research, other institution, self or spouse, shop around, store or dealer, and telemarketer.

Business professionals, such as financial planners, accountants, and lawyers, remain the most relied upon source. Their popularity has remained stable since 2010.

Traditional advertisements and media, such as through TV and radio, have dropped in overall popularity. The percentage of Americans who call around to financial institutions for investment information has also declined.

Conversely, friends, relatives, and associates have grown in popularity as an information source. Meanwhile, the internet has been the fastest-growing source, used by three times more families in 2019 compared to 2001.

Digital Investment Decisions

A separate survey conducted by consulting firm Brunswick revealed the specific places people go online when making investment decisions.

Digital Investment Decisions

Search engines, blogs, and specialist email newsletters are the most popular sources. Among blogs, Seeking Alpha is the most popular, used by 34% of those surveyed.

Twitter and LinkedIn are the most commonly-used social media platforms. The proportion of investors using Twitter for information has grown by 36 percentage points since 2014.

Implications for Investors and Advisors

If you’re an investor, this information can help you gauge how your research process compares to the general American population. Is your preferred information source popular with others, or is it less common? For those who have yet to get started investing, this may give you some ideas on where you can start looking for information.

If you’re an advisor, these research trends can have important implications for your business. While business professionals remain the most-used source, other sources of information are shifting. Traditional advertising and inbound calls from potential clients continue to be less common. Instead, advisors may want to shift their focus to building an online presence and increasing referrals from existing clients.

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Markets in a Minute

Visualizing Asset Class Correlation Over 25 Years (1996-2020)

To minimize volatility, it’s important to consider asset class correlation. Learn how correlation has changed over time depending on macroeconomic events.

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Asset Class

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Asset Class Correlation Over 25 Years

How can you minimize the impact of a market crash on your portfolio? One main strategy is building a portfolio with asset classes that have low or negative correlation.

However, the correlation between asset classes can change depending on macroeconomic factors. In this Markets in a Minute from New York Life Investments, we show the correlation of select asset classes and how they have shifted over time.

What is Correlation?

Correlation measures how closely the price movement of two asset classes are related. For example, consider asset class A and B.

  • If asset class A rises 10% and asset class B also rises 10%, they have a perfect positive correlation of 1.
  • If asset class A rises 10% and asset class B doesn’t move at all, they have no correlation.
  • If asset class A drops 10% and asset class B rises 10%, they have a perfect negative correlation of -1.

When investors are building a portfolio, asset classes with negative correlation or no correlation are most desirable. This is because if one asset class drops during a market downturn, the other asset class will either rise or be unaffected.

Correlation Between Stock Categories

Stock categories have historically had some level of positive correlation. Here are the correlations for small and large cap stocks, as well as developed and emerging market stocks.

 U.S. Small Cap vs. U.S. Large Cap StocksDeveloped vs. Emerging Market Stocks
19960.640.51
19970.630.76
19980.970.87
19990.580.80
20000.380.74
20010.870.78
20020.730.90
20030.850.75
20040.830.79
20050.930.93
20060.750.93
20070.890.75
20080.960.95
20090.910.88
20100.960.97
20110.970.89
20120.910.89
20130.860.86
20140.750.78
20150.820.76
20160.890.73
20170.390.14
20180.880.73
20190.940.91
20200.930.89
Min0.380.14
Max0.970.97

Rolling 1-year correlations based on monthly returns.

When macroeconomic conditions are strong, the correlation between stock categories tends to be lower as investors focus on individual company prospects. However, when market volatility rises, stocks tend to become more correlated as investors move to safer assets.

This was the case in 1998, when small and large cap stocks reached a peak correlation of 0.97. Russia defaulted on its debt, and a highly-leveraged hedge fund called Long Term Capital Management (LTCM) faced its own defaults as a result. Many banks and pension funds were invested in LTCM, and the Federal Reserve bailed out the fund to avoid a bigger crisis.

Shortly thereafter, small and large cap stock correlation reached a low in 2000. The dotcom bubble initially burst among large cap stocks, impacting some of the world’s largest companies. Small cap stocks didn’t see losses until 2002.

For developed and emerging markets, correlation peaked in 2010 when many countries were recovering from the global financial crisis. On the other end of the scale, correlation plummeted to its lowest level in 2017. One reason is that emerging markets became more distinct from one another due to their varying political risk and sector makeup.

Bonds, Commodities, and Currencies

In contrast to stock categories, there are some asset class pairings that have provided a low or negative correlation. Here is historical correlation data for U.S. stocks and bonds, as well as gold and the U.S. dollar.

 U.S. Stocks vs. U.S. BondsGold vs. U.S. Dollar
19960.510.29
19970.68-0.40
1998-0.41-0.19
19990.34-0.36
20000.40-0.44
2001-0.39-0.38
2002-0.72-0.30
2003-0.04-0.43
20040.04-0.65
2005-0.20-0.27
20060.28-0.86
2007-0.44-0.55
20080.34-0.67
20090.64-0.33
2010-0.580.29
2011-0.35-0.59
2012-0.37-0.53
20130.33-0.11
20140.24-0.60
2015-0.26-0.10
2016-0.21-0.58
2017-0.09-0.23
2018-0.26-0.51
2019-0.37-0.51
20200.29-0.43
Min-0.72-0.86
Max0.680.29

Rolling 1-year correlations based on monthly returns.

Stocks and bonds generally have low correlation, with negative correlation in 14 of the last 25 years. Correlation tends to be highest during periods of high inflation expectations. On the flip side, correlation is typically lower during periods of low inflation expectations or high stock market volatility.

These factors contributed to negative correlation in 1998 during the Asian Financial Crisis. Stock prices flattened due to company trade relationships with Asian economies, while bonds benefited from lower rates and lower inflation. In 2002, high market volatility due to the dotcom bubble resulted in stocks and bonds reaching their most negative correlation.

Similarly, gold and the U.S. dollar generally move in opposite directions, with negative correlation in 23 of the last 25 years. When optimism in the U.S. economy is high, the U.S. dollar tends to rise. Conversely, when there are concerns about the U.S. economy or inflation, gold is considered a safe asset that holds its value.

In 2006, gold and the U.S. dollar reached their most negative correlation. As the beginnings of the subprime mortgage crisis appeared, investors piled into safe haven assets such as gold. In 2010, gold and the US dollar had a brief moment of positive correlation. Concerned about the European debt crisis, investors sought safe haven assets elsewhere, including both gold and the U.S. dollar.

Choosing Asset Classes

As investors think about which asset classes to include in their portfolios, it’s important to consider correlation. For instance, stock categories have historically been positively correlated. To diversify, investors may want to consider bonds and alternative assets such as gold.

In addition, macroeconomic events such as financial crises can have an impact on correlation, and investors may want to monitor these changes over time. Finally, considering the risk and return characteristics of various asset classes will allow investors to build a portfolio best suited to their needs.

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