The Bottom Line
- Historically, companies with a long history of growing dividends also have a long track record of producing attractive total returns.
- Consider the S&P 500 Dividend Aristocrats Index—companies in the S&P 500 Index that have increased the dividend payout for at least 25 consecutive years—it notably outperformed the overall S&P 500 Index in the 3-, 5-, 10- and 15-year periods ended June 30, 2017.
- It also accomplished that with lower standard deviation1—a sign that dividend paying equities might also provide a potential cushion from volatility, adding stability to an equity portfolio.
- In addition, consistent dividend growth can be confirmation of a firm’s “quality” status, as it shows the company’s ability to consistently increase cash flow over time.
- Many stocks still offer compelling dividend yields relative to Treasuries today. As of June 30, 2017, the S&P 500 dividend yield, at 1.97%, was higher than the 2-year Treasury note (1.38%) and the 5-year Treasury note (1.89).2
- But it’s important to remember that a high dividend yield isn’t the whole story when comes to selecting dividend stocks—there could be more attractive valuations in stocks that have lower absolute dividend yields, but faster dividend growth rates.
- With income still in high demand—and not easy to find in the current low rate environment—equity income opportunities are definitely worth a closer look.
1 Source: Bloomberg. As of 6/30/17, the 3-year standard deviation of the S&P 500 Dividend Aristocrats Index was 9.69% compared with 10.31% for the S&P 500; the 5-year was 9.49% compared with 9.55%; the 10-year was 14.17% compared with 15.42% and the 15-year was 12.76% compared with 14.09%.
2 Source: Bloomberg.