Dividend Income Strategies Lagging In Strong Up Market

Investors positioned for higher stock and bond prices during the year have not been disappointed. With the Federal Reserve pursuing a lower interest rate policy, bond yields declined for most of the year with a commensurate increase in bond prices. Stock prices have mostly trended higher as well with some of the price increase a recovery from last year's fourth quarter selloff. Returns across most asset classes have been favorable as seen in the below chart. The top half of the chart below displays the asset classes with leading returns and is comprised of U.S. market segments with the bottom half largely foreign markets except for the income focused investments like the 10-Year U.S. Treasury.

With interest rates declining most of this year, one might think this would be a significant tailwind for income yielding equities, yet they have lagged the performance of non yielding equities. The below table from S&P Dow Jones Indices shows the average performance of dividend paying stocks in the S&P 500 Index versus the non-dividend paying counterparts. The non-dividend payers average return of 30.75% is more than double the payers return of 14.54%. The non-payers return is outperforming the cap weighted S&P 500 return of 27.63%.

The below chart compares the performance of the S&P 500 Index to several dividend paying strategies. Also included on the chart is the total return of the 30-year U.S. Treasury since the beginning of the year. The S&P 500 Index return is outpacing the other income strategies with the total return of the 30-year treasury also outperforming the SPDR Dividend ETF (SDY) and the iShares Select Dividend ETF (DVY).

• SDY's strategy corresponds to the S&P High Yield Dividend Aristocrats. The Industrials sector and Financials sector combined account for 33.3% of the index weighting.

• DVY's strategy corresponds to the Dow Jones Select Dividend Index.  The Utility sector and Financial sector combined account for 39% of this index. The stocks in DVY come from a universe that represents the 2,500 largest U.S. stocks based on market capitalization.

• NOBL is the Proshares S&P 500 Dividend Aristocrats. The top two sectors in this index are Industrials and Consumer Staples and combined account for 45.5% of the index weighting.

Historically, income focused equity strategies tend to hold up better than the broader market when the market experiences downside volatility. It may take a market pullback for these dividend strategies to recoup some of the lost ground incurred this year.