By Clayton Fresk, Stadion Money Management
Over the past year or so, the broad US equity market has been on a rather one-way churn higher. There hardly looks to be any real downturns outside some election-based trepidation, which was quickly solved by the Trump Bump.
Throw in that the rally has been tech-fueled (as evidenced by the reemergence of talk of FANG stocks), and it should not be a huge surprise that dividend stocks/indices are underperforming. What may be of surprise is the degree to which they are underperforming.
While there is a plethora of Dividend ETFs available in the market, for the following analysis I used the underlying index data for the top eight broad dividend ETFs based on AUM, which is as follows:
Additionally, rather than run each index individually, I created an Average Dividend Index return series. In addition to making the analysis cleaner, this also balanced out some of the methodology differences in the aforementioned indices (such as GICS sector exposure).
The first chart is the relative performance of this Average Dividend Index as compared to the S&P 500 since September 2006 (which was the latest inception of the aforementioned indices):
While there is expected ebb and flow in the relative performance, the sharp drop off on the right hand side of the graph (performance since 6/30/2016) is quite noticeable. Now while some of this could be mean reversion from the outperformance spike in early 2016, the degree of the reversion seems a bit extreme.
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While the absolute performance of this average dividend index is decently strong on its own (10.23% since 6/30/16), the relative performance of it versus the S&P 500 (at +17.16%) makes it seem a bit more paltry. This next chart shows the rolling 11-month relative performance going back to the same 9/2006 date. I chose an 11-month period to correspond with the peak in relative performance from the chart above (6/30/16), with the analysis ending at the recent month end.
This recent bout of relative performance has been the worst since right before the 2007 bear market and then the subsequent rally off the 2009 lows. (Is this also a sign that we are nearing an equity market top similar to that of 2007? We will save that question for another day!)
One cause of relative performance of dividend stocks/indices as compared to the broad market is their higher correlation to interest rates. This has been one cause of the dispersion since the middle of 2016, as interest rates have climbed since that point (and hence the total return of treasuries has declined). For reference, here is the same chart as above with the 10-year Treasury total return overlaid:
So while it is definitely not a perfect correlation, the two series for the most part move in tandem. So does this then beg the question of whether or not the dividend relative performance is warranted since rates have climbed since the aforementioned 6/30 date? Here is a shorter-term view of the relative performance since said date:
Unlike treasuries, the relative performance of dividends did not bottom out after the post-election spike in rates. Conversely, dividends also have not seen a turnaround in performance once rates started to fall again. So while there is some minor dispersion at the end of this chart, the performance overall is somewhat in line.
As mentioned, the above analysis was done using the average of eight different indices. Nevertheless, it is also important to note that there has been some rather large dispersion in the performance of these indices since 6/30/16.
While there are numerous differences that are causing the dispersion (e.g., GICS sector exposure, market cap, dividend yield, base index provider, etc.), it should be noted that some of these names have held up better than others. So while one of these names (or any of the ETFs available in the market) may or may not be better than another, further research is warranted on which vehicle to use if an investor thinks a move into dividend exposure is warranted at this time.
Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.
Disclosure Information
Past performance is no guarantee of future results. Investments are subject to risk and any investment strategy may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. One cannot invest directly in indexes, which are unmanaged and do not incur fees or charges. Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or www.stadionmoney.com. SMM-062017-588