Monday, October 19, 2020

Dividend Paying Strategies Have Lagged This Year, Now An Opportunity?

One unique aspect of the difficult economic environment that followed the virus mandated shutdown, was the underperformance of high quality dividend paying stocks. From the S&P 500 Index peak in mid February to the bottom on March 23, 2020, one of the weakest performing asset classes was dividend paying stocks. As the below chart shows, the iShares Select Dividend ETF (DVY), the SPDR Dividend ETF (SDY) and the Proshares S&P 500 Dividend Aristocrats ETF (NOBL) were some of the weakest performing large cap equity categories. The second chart below shows the dividend paying categories have kept pace with the broader market since bottom in March.

In retrospect, it is not surprising that dividend paying stocks struggled at the onset of the shutdown. As the entire economy was nearly shuttered, even high quality dividend paying companies faced significant revenue shortfalls. These companies then either suspended or cut their dividends to protect the company's cash flow. The purple line on the below chart shows the decline in dividend payments. Stock buybacks have also been curtailed. In an early October report from S&P Dow Jones Indices, they note third quarter 2020 dividends are also down from second quarter dividends, $115.5 billion versus $119.0 billion, respectively.

As the economy continues to reopen, and in a low interest rate environment, dividend paying stocks may provide some opportunity for investors. As a note of caution though, chasing yield in and of itself can be recipe that leads to underperformance.

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