The Power of Dividends - Hartford Funds

2024

Insight

The Power of Dividends: Past, Present, and Future

Is all the talk about dividend-paying stocks just a fad? Or is there real merit to the dividend

argument, particularly at this point in market history?

In the 1990 film ¡°Crazy People,¡± an advertising executive decides to create a series

of truthful ads. One of the funniest ads says, ¡°Volvo¡ªthey¡¯re boxy but they¡¯re

good.¡±

Key Points

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

The Long-Term View

Payout Ratio: A Critical Metric

Dividends have played a significant role in the returns investors have received

during the last several decades. Going back to 1960, 85% of the cumulative total

return of the S&P 500 Index1 can be attributed to reinvested dividends and the

power of compounding as illustrated in FIGURE 1 (31% on an average annual

basis).

FIGURE 1

Decade By Decade: How

Dividends Impacted Returns

Highest Doesn¡¯t Always

Mean Best

Do Dividend Policies Affect

Stock Performance?

Fig 8

Lowest Risk and Highest

Returns for Dividend Growers

and Initiators

The Future for Dividend

Investors

$15,000

The Power of Dividends and Compounding

Growth of $10,000 (1960¨C2023)

$14,000

$6,000,000

$13,000

$5,118,735

$5,000,000

$12,000

$11,000

$4,000,000

$10,000

$3,000,000

$9,000

$8,000

$2,000,000

$7,000

$1,000,000

$0

1960

$796,432

1970

1980

1990

2000

2010

2019

$6,000

$5,000

$4,000

2023

$3,000

¡ö S&P 500 Index Total Return (Reinvesting Dividends)

¡ö S&P 500 Index Price Only (No Dividends)

$2,000

As of 12/31/23. Past performance does not guarantee future results. Indices are unmanaged

and not available for direct investment. Dividend-paying stocks are not guaranteed to outperform nondividend-paying stocks in a declining, flat, or rising market. For illustrative purposes only. Data Sources:

Morningstar and Hartford Funds, 1/24.

$1,000

$0

1973

ge annual total return

35%

1

1

30%

30%

28%

16%

S&P

25%500 Index is a market capitalization-weighted price index composed of 500 widely held

common stocks.

17%

Average

for All

Decades

20%

15%

10%

67%

44%

23%

$4,500

41%

$4,000

1983

Insight

Decade By Decade: How Dividends Impacted Returns

Looking at average stock performance over a longer time frame provides

a more granular perspective. From 1940¨C2023, dividend income¡¯s

contribution to the total return of the S&P 500 Index averaged 34%. Looking

at S&P 500 Index performance on a decade-by-decade basis shows how

dividends¡¯ contribution varied greatly from decade to decade.

FIGURE 2

Dividends¡¯ Contribution to Total Return Varies By Decade

Dividends were deemphasized in the 1990s,

but after the dot-com

bubble burst, investors

once again turned their

attention to dividends.

S&P 500 Index Annualized Total Return by Decade (%)

25

20

15

10

67%

30%

5

44%

73%

28%

16%

N/A*

17%

15%

2000s

2010s

2020s

0

-5

1940s

1950s

n Total Return

1960s

1970s

1980s

1990s

n Dividend Contribution of Total Return

As of 12/31/23. Past performance does not guarantee future results. Indices are

unmanaged and not available for direct investment. * Total return for the S&P 500 Index was

negative for the 2000s. Dividends provided a 1.8% annualized return over the decade. For

illustrative purposes only. Data Sources: Morningstar and Hartford Funds, 1/24.

During the 1940s, 1960s, and 1970s, decades in which total returns were

lower than 10%, dividends played a large role in terms of their contribution

to total returns. 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.

During the 1990s, dividends were de-emphasized. At the time, companies

thought they were better able to deploy their capital by reinvesting it in

their businesses rather than returning it to shareholders. Significant capital

appreciation year in and year out caused investors to shift their attention

away from dividends.

From 2000 to 2009, a period often referred to as the ¡°lost decade,¡± the

S&P 500 Index produced a negative return. Thanks to the dot-com bubble

burst in March 2000, stock investors once again turned to fundamentals

such as P/E ratios2 and dividend yields. 3

2

2

Price/earnings ¡°P/E¡± ratio is the ratio of a stock¡¯s price to its earnings per share.

3

Dividend yield is a company¡¯s dividend per share divided by its share price.

Insight

FIGURE 3 summarizes the dividend yield for the S&P 500 Index from 1960¨C

2023. According to Yale, the median dividend yield for the entire period was

2.90%, with yields peaking in the 1980s and bottoming in the 2000s. Today,

some investors are increasingly seeking to reduce risk in their portfolios by

shifting some gains from growth stocks into dividend-paying stocks.

FIGURE 3

The S&P 500 Index¡¯s Dividend Yield Has Been Relatively Stable Over

the Past Decade (1960¨C2023)

7

6

7

5

6

4

5

3

4

2

3

1

0

1960

2023

1

As of 12/31/23. Past performance does not guarantee future results. Indices are

unmanaged and not available for direct investment. For illustrative purposes only. Data Sources:

Yale and Hartford Funds, 1/24.

0

1970

1980

1990

2000

2010

Highest Doesn¡¯t Always Mean Best

Investors seeking dividend-paying investments may make the mistake

of simply choosing those that offer the highest yields possible. A study

conducted by Wellington Management reveals the potential flaws in this

thinking.

Since 1930, the study found that stocks offering the highest level of

dividend payouts performed in line overall with those that pay high, but not

the very highest, level of dividends, though they often traded leadership

over the decades.

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%) consisted of the lowest dividend payers.

1970

1980

1990

14

13

12

11

10

9

8

7

6

This conclusion is counterintuitive: Why wouldn¡¯t the highest-yielding stocks

5

have the best historical total returns? Isn¡¯t the ability to pay a generous

4

dividend a sign of a healthy underlying business?

3

Black Tuesday

2

We¡¯ll answer these questions in a moment, but we¡¯ll begin by summarizing

1

the methodology and findings of the study.

0

Wellington Management began

dividing

stocks

1880 by

1890

1900 dividend-paying

1910 1920 1930

1940into

1950 1960 1970

3

Black Monday

2

Since 1930, stocks

offering the highest level

Black Monday

B

o

of dividend

payouts

performed in line overall

with those that pay high,

but not the very highest,

1980 1990 2000 2010 2015

level of dividends.

200

Insight

FIGURE

4 summarizes

the performance

of the S&P

500 Index as a40.00%

whole

70.00%

70.00%

60.00%

50.00%

relative to each quintile over nine decades.

FIGURE 4

First- and Second-Quintile Stocks Outperformed Most Often (1930¨C2023)

Percentage of Time Dividend Payers by Quintile Outperformed the

S&P 500 Index (summary of data in FIGURE 5)

70%

1st Quintile

70%

60%

2nd Quintile

3rd Quintile

50%

4th Quintile

40%

5th Quintile

As of 12/31/23. Past performance does not guarantee future results. Indices are unmanaged

and not available for direct investment. Data Sources: Wellington Management and Hartford

Funds, 2/24.

The first- and second-quintile stocks tied for first and outperformed the S&P

500 Index in seven out of 10 time periods (1930 to 2023), while third-quintile

stocks came in second, beating the Index 60% of the time. Fourth- and fifthquintile stocks lagged behind by a significant margin.

FIGURE 5

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

(1930¨C2023)

S&P 500 Index

1st Quintile

2nd Quintile

3rd Quintile

4th Quintile

5th Quintile

Jan 1930 to Dec 1939

-0.20

-2.36

0.61

-2.34

-0.38

2.07

Jan 1940 to Dec 1949

9.51

13.92

13.06

10.26

8.63

6.83

Jan 1950 to Dec 1959

18.33

18.52

20.31

18.47

16.57

19.81

Jan 1960 to Dec 1969

8.26

8.82

8.90

6.46

7.97

9.30

Jan 1970 to Dec 1979

6.05

9.67

10.22

7.00

7.57

3.94

Jan 1980 to Dec 1989

16.80

20.23

19.62

17.20

16.19

14.65

Jan 1990 to Dec 1999

17.96

12.37

15.54

15.06

18.10

18.93

Jan 2000 to Dec 2009

-0.44

5.57

4.15

4.21

1.99

-1.75

Jan 2010 to Dec 2019

13.65

12.98

13.25

14.15

13.68

10.85

Jan 2020 to Dec 2023

11.59

14.03

9.98

7.68

16.39

10.86

As of 12/31/23. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. 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 2023. For illustrative purposes only. Data Sources: Wellington Management and Hartford Funds, 2/24.

4

Insight

Payout Ratio: A Critical Metric

One reason why second-quintile dividend-paying stocks outperformed

first quintile stocks over multiple decades 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.4 The

first-quintile stocks had an average dividend payout ratio of 75%, while the

second quintile had a 41% average payout ratio.

A payout ratio of 75% 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 in the financial markets as a sign of

weakness and frequently results in a decline in the price of the company¡¯s

stock.

FIGURE 6

Average Dividend Payout Ratio

(1979-2023)

1st Quintile

2nd Quintile

75%

41%

Chart data as of 1/31/79-12/31/23. Past performance does not guarantee future results.

Indices are unmanaged and not available for direct investment. Payout ratios illustrated are for

stocks within the Russell 1000 Index. For illustrative purposes only. Data Sources: Wellington

Management and Hartford Funds, 2/24.

75%

41%

4

5

The Russell 1000 Index measures the performance of the large-cap segment of the US equity universe.

The best way to measure

whether a company

will be able to pay a

consistent dividend is

through the payout ratio.

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