Wednesday, January 20, 2021

Maybe Time To Include Dividend Growth Equities To One's Portfolio

The broadening in performance across multiple equity asset classes is providing investors with investment opportunities outside of the S&P 500 Index. The S&P 500 Index has certainly been a stalwart in terms of performance over the last five and ten years. Given the strength in the equity market and the index trading at valuation levels that some call stretched, investors might consider dividend paying stocks for a portion of their portfolio. One characteristic of dividend payers is they generally hold up better in down equity markets.

This lower downside volatility for the dividend payers did not hold true during the pandemic swoon in February and March last year. This makes some sense as the broad economy was shuttered and even high quality companies were negatively impacted due to significantly reduced business. As the economy has slowly reopened though, the dividend payers are now resuming leadership. As the below chart shows, the S&P 500 Index is trailing the return of three other dividend focused indexes.

The Vanguard Dividend Appreciation Index (VIG) is trailing the S&P 500 Index. One aspect of VIG is it tracks the NASDAQ US Broad Dividend Achievers Select Index. One criteria necessary to qualify as a Dividend Achiever stock is not missing a dividend increase in 10 years or more. The same measure for the Dividend Aristocrats (NOBL) is a history of increasing the company dividend in 25 years or more. 

As the time period increases for dividend increases, fewer companies qualify as an Aristocrat. So with VIG, the index is comprised of 212 companies and the S&P 500 Dividend Aristocrats Index is comprised of 65 companies. With VIG then, it has a broader diversification; hence, a larger weighting in technology at approximately 19%. The highest technology weighting from the other dividend ETF's shown on the chart is 7%. The S&P 500 technology sector weighting is 27%. With the FANGMA stocks weaker performance since August, the S&P 500 Index and VIG have lagged the dividend payers.

Lastly, although the Democrats have a narrow hold on both houses of Congress, tax policy is likely to change as President Biden indicated on the campaign trail. Some of the proposed changes are likely to impact the tax rate paid on capital gains and dividends. These changes may not occur until 2022, but importantly, investors should not let the tax tail wag the dog.

At the end of the day, investors have attractive investment alternatives versus concentrating one's investments in the FANGMA stocks. Even international equities, including emerging market equities are beginning to outperform their U.S. counterparts. This might be the year asset class diversification benefits investors.

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