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February 2023

Revisiting Resilience — the Ramifications of Recession

Key Points

  • During 2022, dividend stocks demonstrated their typical resilience in the face of a bear market
  • Dividend growth holds up better than earnings growth in a typical recession, should we experience one
  • Dividend income underpins portfolio value, which is less volatile than market pricing

During 2022, dividend stocks demonstrated their usual resilience in the face of a bear market, with our benchmark, the Dow Jones Select Dividend Index, posting a total return of 2.5%. Dividend stocks strongly outperformed the S&P 500 (down -18.1%), and the S&P Value stocks (-5.2%) they more closely resemble. While markets have certainly seen volatility, with interest rates, the Fed hiking cycle and inflation all Higher for Longer, one shoe hasn’t yet dropped. We have not actually entered a recession. Meanwhile, earnings growth and expectations have remained positive, with 2022 S&P EPS growth expected to conclude up +6%, and 2023 estimates currently reflecting growth of +5%.

Of course, we do not know what the future will bring. However, we do know that risks of recession are elevated going into 2023. But while dividend stocks may see some earnings pressure, they continue to reward investors with income. In times of economic stress, income investors usually increase their focus on yield as a valuation metric over near-term earnings trends.

At CNR, we have long viewed dividend income, and dividend yield, as underpinning the value of our portfolio. While stock prices may fluctuate significantly, our portfolio of dividends, our income stream, does not. That income supports the more stable and growing value of our portfolio, to be realized in price over the long term.

Absent another crisis akin to the Great Financial Crisis, we expect the dividends of attractively yielding stocks to hold up better than dividends of the broader market. We expect CNR Equity Income portfolio dividends, run through our fundamental and quantitative quality screens, to do even better. Over the longer term, we expect dividend stock income growth to continue to grow at its historical rate of +5%.


Finally, while price may be disconnected from value in the short term, our attractive yield provides an element of tangible return in the near term. In a year that starts with more than the usual uncertainty regarding the directions of earnings growth and macroeconomic pressure, we can have confidence that our portfolio will deliver on that +3%–4% weighted average gross yield of its constituents. That provides a head start on successfully achieving client goals over the course of the year. We have found that that yield accounts for approximately half of the total return of a dividend stock portfolio over time.

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