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August 2023

Here We Are Again

Key Points

  • Prior episodes of pronounced dividend stock underperformance have been followed by pronounced outperformance
  • Current underperformance is being driven by a combination of factors, but not dividend risk
  • We expect dividend stocks to benefit investors continuing to hold diversified equity portfolios throughout the cycle

Thus far in 2023, we have seen some strong reversals in market trend and near-term outlook. Year to date, we have seen a complete reversal of our dividend universe’s strong 2022 outperformance of +20.6%. 

For perspective, we look to our benchmark, the DJ US Select Dividend Index, which has outperformed over its 30+ year history. But long-term outperformance doesn’t mean constant outperformance, and there have been three notable periods of dividend stock underperformance versus the S&P over the past 30 years. 

The first was the Tech Bubble. The dividend universe consists of companies further along in their life cycles, investing in growth, to be sure, but also generating cash flow and returning it to shareholders.  Technology stocks are a much smaller portion of the dividend universe.

The second was the Great Financial Crisis (GFC). Banks have historically been overrepresented amongst the ranks of attractive dividend payers. The nature of the financial crisis impacted the dividend universe significantly.

And the third was the result of the business interruption from the lockdowns in 2020 and rapid expansion of fiscal and monetary stimulus.

Nevertheless, after each of these periods, we saw dividend stocks revert to outperformance, and after the most pronounced relative drawdown, the Tech Bubble, multi-year outperformance.

In a sense, 2023 has seen a combination of the performance pressures of all three of these situations combined. The dividend universe started the year 18% underweight technology and more than 7% overweight financials. We’ve had a risk-on rally, fueled by AI FOMO*, and high profile bank failures that have driven some counter-trend market support from the Fed.

However, while there are challenges in certain areas of the economy, and banks certainly face pressures, we still do not see widespread risks to dividends as in the GFC. Leverage and liquidity are in far better shape, largely due to the lessons of prior crises. And we continue to see overall dividend growth in-line or better than long-term averages. To us, that’s an indicator of compounding value. Meanwhile, we’ve seen an ongoing valuation disconnect that hasn’t been seen since the Tech Bubble.

Moreover, we think it is too early to call the all-clear to macroeconomic concerns, and we expect the more defensive nature of dividend stocks will benefit investors who continue to hold diversified equity portfolios.

Chart 1:1-Year Rolling Total Return Difference (DJDVP vs. S&P 500)
Source: Factset, 6/30/23. Past performance is no guarantee of future results.



*Fear of missing out

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