The Power of Dividends - Hartford Funds

[Pages:12]2021

Insight

The Power of Dividends

Past, Present, and Future

Inside:

The Long-Term View

Decade By Decade: How Dividends Impacted Returns

When "High" Beat "Highest"

Payout Ratio: ACritical Metric

Do Dividend Policies Affect Stock Performance?

Lowest Risk and Highest Returns for Dividend Growers & Initiators

The Future for Dividend Investors

Fig 1

Fig 2

1

IN THE 1990 FILM "CRAZY PEOPLE," AN ADVERTISING EXECUTIVE DECIDES TO CREATE A SERIES OF TRUTHFUL ADS. One of the funniest ads says, "Volvo--they're boxy but they're good."

Dividend-paying stocks are like the Volvos of the investing world. They're not fancy at first glance, but they have a lot going for them when you look deeper under the hood. In this insight, we'll take a historical look at dividends and examine the future for dividend investors.

The Long-Term View

Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1970, 84% of the total return of the S&P 500 Index1 can be attributed to reinvested dividends and the power of compounding, as illustrated in FIGURE 1.

FIGURE 1

The Power of Dividends and Compounding

Growth of $10,000 (1960?2020)

$4,000,000 $3,500,000 $3,000,000

I S&P 500 Index Total Return (Reinvesting Dividends) I S&P 500 Index Price Only (No Dividends)

$3,845,730

$2,500,000

$2,000,000

$1,500,000

$1,000,000 $500,000

$627,161

$0

1960 1970 1980 1990 2000 2010 2019 2020

Fig 8

$ $ $

Data Sources: Morningstar and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only. Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising market.

I S&P 500 Index Dividend Contribution to Total Return I S&P 500 Index Price Only (No Dividends)

20%

30% 15%

16% 28%

Average for All Decades

Average annual total return

17%

1 S&P 500 Index is a market capitalization-weighted price index composed of 500

10%

widely held common stocks. Indices are unmanaged and not available fo4r1%direct

investment.67%

44%

5%

73% NA*

0% 1940s

1950s

1960s

1970s

1980s

1990s

2000s

2010s

19302020

Fig 9

$4,000,000

I S&P 500 Index Total Return (Reinvesting Dividends)

$3,500,000 I S&P 500 Index Price Only (No Dividends) $3,000,000

$2,50I0n,0s00ight

$2,000,000

$3,845,730

$10,000 $9,000 $8,000 $7,000

$1,500,000

$6,000

$D1e,0c0a0d,0e0B0y Decade: How Dividends Impacted Returns

La$om5oo0kir0ne,g0g0ar0tanavuelarragpeersstpoeckctpiveer.foFrromman1c9e30ov?2e0r 2a0l,odnigveidretnimdeinfcraommee'ps r$o6v2id7e,1s61 contribu$ti0on to the total return of the S&P 500 Index averaged 41%. Looking at S&P 50019In6d0ex1p9e70rfor1m98a0nce1o9n90a de2c0a0d0e-b2y0-d1e0cade20b1a9sis s2h0o2w0s how dividends' contribution varied greatly from decade to decade.

FIGURE 2

Dividends' Contribution to Total Return Varies By Decade

I S&P 500 Index Dividend Contribution to Total Return I S&P 500 Index Price Only (No Dividends)

$5,000

$4,000

$3,000

$2,000

D$i1v,0i0d0ends were

de-e$0mphasized in the

1972

1982

1990s, but after the

Average annual total return

20%

30% 15%

28%

16%

Average for All Decades

17%

10%

67% 5%

44%

73%

41% NA*

dot-com bubble burst, Fig 9 investors once again

turned their attention to $3,000

dividends.

$2,500

0% 1940s

1950s

1960s

1970s

1980s

1990s

2000s

2010s

19302020

$2,000

Data Sources: Morningstar and Hartford Funds, 2/21. *Total return for the S&P 500 Index was negative for the 2000s. Dividends provided a 1.8% annualized return over the decade. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

Dividends played a large role in terms of their contribution to total returns during the 1940s, 1960s, and 1970s, decades in which total returns were lower than 10%. By contrast, dividends played a smaller role during the 1950s, 1980s, and 1990s when average annual total returns for the decade were well into double digits.

$1,500

$1,000

$500

$0 1945

1955

1965

1975

During the 1990s, dividends were de-emphasized. At the time, companies thought they were better able to deploy their capitalFbigy 1re0investing it in their businesses rather than returning it to shareholders. Significant capital appreciation year in and year out caused investors to shift their atte$n14ti0on away from dividends.

From 2000 to 2009, a period often referred to as the "lost decade," $th1e20 S&P 500 Index produced a negative return. Largely as a result of the bursting of the dot-com bubble in March 2000, stock investors once$100 again turned to fundamentals such as P/E ratios2 and dividend yields.

$80

1992 198

$60

$40

$20

$0 400% 360% 320%

2 Price/earnings "P/E" ratio is the ratio of a stock's price to its earnings per sh2a8r0e%. 240%

200% 2

160%

120%

Insight

FIGURE 3 summarizes the dividend yield for the S&P 500 Index from 1960? 2020. According to Yale, the median dividend yield for the entire period was 2.92%, with yields peaking in the 1980s and bottoming in the 2000s. Today, investors continue to place a high premium on the more tangible and immediate returns that dividends provide.

FIGURE 3

The S&P 500 Index's Yield Has Been Relatively Stable Over the Past Decade

S&P 500 Index Dividend Yield (1960?2020)

7

6

7

5

6

4

5

3

4

2

3

1

0

1960

1970

1980

1990

2000 2010 2020

Data Sources: Yale and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

2 1 0

1970

Black Monday

1980

1990

When "High" Beat "Highest"

Investors seeking dividend-paying investments may make the mistake

14

of simply choosing those that offer the highest yields possible. A study conducted by Wellington Management reveals the potential flaws in this

13

thinking.

12

11

The study found that stocks offering the highest level of dividend payouts

Stocks offering the have not performed as well as those that pay high, but not the very highest level of dividend highest, levels of dividends.

10 9

8

This conclusion is counterintuitive: Why wouldn't the highest-yielding stocks have the best historical total returns? Isn't the ability to pay a

7 payouts have not

generous dividend a sign of a healthy underlying business?

We'll answer these questions in a moment, but we'll begin by summarizing the methodology and findings of the study.

6 5 4

performed as well as those tBhlacaktMopndaayy high, but

Wellington Management began by dividingBldacivkidTueensdd-apyaying stocks into

3 2

not the very highest,

levels of dividends. quintiles by their level of dividend payouts. The first quintile (i.e., top 20%)

consisted of the highest dividend payers, while the fifth quintile (i.e., bottom 20%) co1n88s0iste1d8o90f the19l0o0wes1t91d0ivid1e9n20d pa1y93e0rs. 1940 1950 1960

1 0 1970

1980

1990

2000

2010 2015

3

Insight

FIGURE 4 summarizes the performance of the S&P500 Index as a whole relative to6e6a.7c%h quint7il7e.8o%ver the66p.a7s%t eight4d4e.c4a%des. 44.4%

FIGURE 4

Second-Quintile Stocks Outperformed Most Often From 1930?2020

Percentage of Time Dividend Payers by Quintile Outperformed the S&P 500 Index (summary of data in FIGURE 5)

66.7%

77.8%

66.7%

44.4%

44.4%

1st Quintile 2nd Quintile 3rd Quintile 4th Quintile 5th Quintile

Data Sources: Wellington Management and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment.

The second-quintile stocks outperformed the S&P 500 Index seven out of the ten time periods (1930 to 2020), or 77.8% of the time, while first- and third-quintile stocks tied for second, beating the Index 66.7% of the time. Fourth- and fifth-quintile stocks lagged behind by a significant margin.

FIGURE 5

Compound Annual Growth Rate (%) for US Stocks by Dividend Yield Quintile by Decade

(1929?2020)

Jan-1930 to Dec-1939 Jan-1940 to Dec-1949 Jan-1950 to Dec-1959 Jan-1960 to Dec-1969 Jan-1970 to Dec-1979 Jan-1980 to Dec-1989 Jan-1990 to Dec-1999 Jan-2000 to Dec-2009 Jan-2010 to Dec-2019 Jan-2020 to Dec-2020

S&P 500 -0.20 9.51 18.33 8.26 6.05 16.80 17.96 -0.44 13.65 18.40

1st Quintile -2.36 13.92 18.52 8.82 9.67 20.23 12.37 5.57 12.98 -4.90

2nd Quintile 0.61

13.06 20.31

8.90 10.22 19.62 15.54

4.15 13.25

4.70

3rd Quintile -2.34 10.26 18.47 6.46 7.00 17.20 15.06 4.21 14.15 5.28

4th Quintile -0.38 8.63 16.57 7.97 7.57 16.19 18.10 1.99 13.68 32.50

5th Quintile 2.07 6.83

19.81 9.30 3.94 14.65 18.93 -1.75 10.85 24.87

Data Sources: Wellington Management and Hartford Funds, 2/21. US stocks are represented by the S&P 500 Index. Chart represents the compound annual growth rate (%) for US stocks by dividend yield quintile by decade from 1930-2019 and January 2020-December 2020. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

4

Insight

Payout Ratio: A Critical Metric

One reason why second-quintile dividend stocks came out ahead is because the first-quintile's excessive dividend payouts haven't always been sustainable. The best way to measure whether a company will be able to pay a consistent dividend is through the payout ratio.

The payout ratio is calculated by dividing the yearly dividend per share by the earnings per share. A high payout ratio means that a company is using a significant percentage of its earnings to pay a dividend, which leaves them with less money to invest in future growth of the business.

The chart below illustrates the average dividend payout ratio since 1979 for the first two quintiles of dividend payers within the Russell 1000 Index.3 The first-quintile stocks had an average dividend payout ratio of 74%, while the second quintile had a 41% average payout ratio.

A payout ratio of 74% could be difficult to sustain if a company experiences a drop in earnings. Once this happens, a company could be forced to cut its dividend. A dividend cut is often viewed as a sign of weakness in the financial markets and frequently results in a decline in the price of the company's stock.

FIGURE 6

Average Dividend Payout Ratio

(1/31/79-12/31/20)

1st Quintile 2nd Quintile

74% 41%

Data Sources: Wellington Management and Hartford Funds, 2/21. Payout ratios illustrated are for stocks within the Russell 1000 Index. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

The best way to measure whether a company will be able to pay a consistent dividend is through the payout ratio.

70% 47%

3 The Russell 1000 Index measures the performance of the large-cap segment of the US equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.

5

Insight

Do Dividend Policies Affect Stock Performance?

In an effort to learn more about the relative performance of companies according to their dividend policies, Ned Davis Research conducted a study in which they divided companies into two groups based on whether or not they paid a dividend during the previous 12 months. They named these two groups "dividend payers" and "dividend non-payers."

The "dividend payers" were then divided further into three groups based on their dividend payout behavior during the previous 12 months. Companies that kept their dividends per share at the same level were classified as "no change." Companies that raised their dividends were classified as "dividend growers and initiators." Companies that lowered or eliminated their dividends were classified as "dividend cutters or eliminators." Companies that were classified as either "dividend growers and initiators" or "dividend cutters and eliminators" remained in these same categories for the next 12 months, or until there was another dividend change.

For each of the five categories (dividend payers, dividend non-payers, dividend growers and initiators, dividend non-payers, and no change in dividend policy) a total-return geometric average was calculated; monthly rebalancing was also employed.

It's important to point out that our discussion is based on historical information regarding different stocks' dividend-payout rates. Such past performance can't be used to predict which stocks may initiate, increase, decrease, continue, or discontinue dividend payouts in the future.

Based on the Ned Davis study, it's clear that companies that cut their dividends suffered negative consequences. In FIGURE 7, dividend cutters and eliminators (e.g., companies that completely eliminated their dividends) were more volatile (as measured by beta4 and standard deviation5) and fared worse than companies that maintained their dividend policy.

Lowest Risk and Highest Returns for Dividend Growers & Initiators

In contrast to companies that cut or eliminated their dividends, companies that grew or initiated a dividend have experienced the highest returns relative to other stocks since 1973--with significantly less volatility. This helps explain why so many financial professionals are now discussing the benefits of incorporating dividend-paying stocks as the core of an equity portfolio with their clients.

FIGURE 7

Average Annual Returns and Volatility by Dividend Policy

S&P 500 Index 1973-2020

Companies that grew or initiated a dividend have experienced the highest returns relative to other stocks since 1973-- with significantly less volatility.

Dividend Growers & Initiators Dividend Payers No Change in Dividend Policy

Dividend Non-Payers Dividend Cutters & Eliminators Equal-Weighted S&P 500 Index

Returns

13.20% 12.83% 10.97% 12.18% 10.20% 12.57%

Beta

0.88 0.94 1.00 1.18 1.18 1.00

Standard Deviation

16.08% 16.81% 18.58% 22.12% 24.47% 17.41%

Data Sources: Ned Davis Research and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

4 Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index. 5 Standard deviation measures the spread of the data from the mean value.

6

Insight

Dividend Growth May Be a Key to Outperformance

Corporations that consistently grow their dividends have historically exhibited strong fundamentals, solid business plans, and a deep commitment to their shareholders.

The market environment is also supportive of dividends. A strong US economy has helped companies grow earnings and free cash flow, resulting in record levels of

cash on corporate balance sheets (FIGURE 9). This excess cash should allow businesses with existing dividends to maintain, if not grow, their dividends. Interest rates are likely to stay historically low for some time, meaning dividend-paying stocks continue to offer attractive yields relative to many fixed-income asset classes.

FIGURE 8

Returns of S&P 500 IndeFxigS8tocks by Dividend Policy: Growth of $100 (1973?2020)

n Dividend Growers & Initiators

$12,000 $11,000

$11,346

eturn (Reinvestinng DDiviivdiednedsn)d P$a3y,8e4r5s,730

$10,000

nly (No Dividendns) Equal-Weighted

$9,000

S&P 500 Index

n No Change

$8,000

$4,000,000 in Dividend Policy

$7,000

$3,500,00n0

DIivSi&dPe5n00dInNdoexnT-oPtaalyReetrusrn (Reinv$e6st,i0n0g0Dividends)

I S&P 500 Index Price Only (No Dividends)

$3,000,00n0 Dividend Cutters

$5,000

$2,500,000 & Eliminato$6r2s7,161

$4,000

$2,000,000 2000$1,520001,000D0 a2t0a1S9our2c0e2s0:

$1,000,00N0 ed Davis Research and Hartford Funds, 2/21.

$500,000

$3,000 $2,000 $1,000

$3,845,730 $627,161

Fig 8 $12,000 $11,000 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000

$6,946

$3,764 $2,189 $844

$0

$0

1960 1970 1980 1990 2000 2010 21091972 2020

1982 $3,000

1992

2002

$56 2020

$2,000

Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For

16% 28%

illustrative

pAuverrapgeoses

for All

only. Fig

9

Decades

$1,000 $0 1972

1982

1992

2002

I S&P 500 Index Divid1e7n%d Contribution to Total Return

I S&P 500 Index Price Only (No Dividends)

Average annual total return

in Billions

12TTI50n%%rhetenhNdAeF*u1a:tfuHter3i0egr%mhfoCartoh4rD1p%oiovfritadhteeenfCdina2I8as%nhnvcCeiaos1l6ut%coldrrissBios,$$d23ce,,o50W00r1p007e%ollrfaoADtfveoreicrraoAadDglelens isvihdaevnedFsig 9

1980s

19901sb0%ee2n000as ccr2u01i0ns g

r1e93c0o- rd

profits,

and

thei$r2b,0a0l0ance

sheets

41%

have

s5%we6l7l%ed as a re4s42u%02l0t. Cash on corporate balance sheets has

more than doubled s73i%nce the early 20NA0$* 10,5's0.0Corporations can

FIGURE 9

Record Levels of Cash on Corporate Balance Sheets

(1945?2020)

$3,000

$2,500

u0%se19t4h0sis e1x95c0sess19c60as sh in 1970s a v1a98r0siety199o0sf w2a00y0ss, s2u010csh a1s930e- xpanding their businesses or making acquisition$s1.,0W00hile t2h020ese

$2,000

options may be attractive in some environments, during uncertain times some corporations ma$y5b00e more cautious and choose to hold on to their cash in cas$e0 of another economic downturn. Companies may also c1h94o5ose t1o95u5se 1965 excess cash to initiate a dividend or increase their existing

$1,500 $1,000 197$5500 1985

1995

2005

3Q2020

dividend payouts. Fig 10

$0 1945

1955

1965

1975

1985

1995 2005

Data Sources: Federal Reserve and Hartford Funds, 2/21.

$140

Fig 10

$

$

$

Fig 12

$ 80%

$ 72002%0 $

60%

50%

40%

30%

20%

10%

3Q2020

0% 19

$120 7

$100

$140 $120

$1,000 $0 1972

1982

1992

2002

$844

$56 2020

Fig 12

Insight Average

for All

Fig 9

Decades

17%

41%

$3,000

*

FIGURE 10 shows th$e2,5c0o0nfluence of two positive trends that could benefit

s

2010s

dividend

1930-

investors:$h2,i0g0h0

corporate

profits

for

S&P

500

Index

companies

c20o20upled with near record-low payout ratios. The average dividend payout

ratio over the past 9$14,5y00ears has been 56.8%. As of December 31, 2020, the

payout ratio stood a$1t,0j0u0st 61.2%--leaving plenty of room for growth.

$500

Fig 10

FIGURE 10

$0 1945

1955

1965

1975

1985

1995 2005

S&P 500 Index Dividend Payout Ratio Quarterly Data (log scale)

(3/31/1926?12/31/2020)

3Q2020

80% 70%

60%

High corp50%orate profits and near40r%ecord-low payout ra30t%ios could benefit d2i0v% idend investors.

10%

0% 1972

1975

1980

1985

1990

$140

$120

GAAP Reported Earnings Per Share = $95.22

Dividends Per Share = $58.28

$100

$80

$60

$40

$20

$0

400% 360% 320%

Average Dividend Payout Ratio = 56.8%

280% 240%

Dividend Payout Ratio = 61.2%

200%

160%

120%

80%

40% 0%

1930 1935 1940 1945 1950 1955 1960

1965

1970 1975 1980

1985

1990

1995 2000

2005

2010

2020

n S&P 500 Index GAAP Reported Earnings Per Share n S&P 500 Dividends Per Share

n Dividend Payout Ratio % (Trailing 4Q Cash Dividends/ Trailing 4Q Reported Earnings)

n Average Dividend Payout Ratio

Data Sources: Ned Davis Research and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

8

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download