Soaring tech giants and their impressive multi-year gains have stolen the show and left many value investors in the dust. This has led many to think that a seismic shift has taken place in the market and that dividends aren’t as important to returns as they used to be.
A look at some global benchmarks and their returns for nearly the past two decades appears to back this up, at least from a price perspective.
Annualized performance for the MSCI ACWI ex-USA index posted returns of 4.24% from 11/01/01 until the end of 2017, easily beating out a high-dividend-yield version of the benchmark which saw gains of 2.83% on average. For global developed markets, as represented by EAFE, a similar trend emerges, with the high-yield version underperforming the traditional index, this time to the tune of roughly 120 basis points per year.
However, this is just one aspect of the picture. Investors also need to consider dividend yields and their contribution to overall return. As is to be expected, the high-yield versions of the indexes mentioned above easily beat out their traditional counterparts from an income perspective, but what may be a surprise is the overall total return comparison.
For both the ACWI ex-USA as well as the EAFE, total returns—which include both price and reinvested dividends—favor high-dividend-yield indexes. In both cases, outperformance is in excess of 60 basis points per year on average.
Source: MSCI as of 12/31/17 (latest available). Past performance does not guarantee future results. For illustrative purposes only. HDY denotes high-yield dividend indexes. Cannot invest directly in an index. Dividends are not guaranteed and companies can stop paying dividends without notice.
In other words, while high-yield indexes might not be able to beat their traditional cousins solely from a price return perspective, they have (historically) more than made up for that gap with their outsized yields. This should underscore the importance of dividend investing, especially over long time frames and across global markets.
And while a dividend-focused approach was clearly a historical winner, the chart above also illustrates how important dividends remain for ‘regular’ indexes as well. In both the ACWI ex-USA and the EAFE indexes, dividends account for more than 40% of the returns for the time frame in question, suggesting that dividends are a crucial component in these kinds of indexes too.
Bottom Line
From a price perspective, dividend-focused indexes often have a hard time keeping up with their more traditional peers. But when you consider dividends and the impact that strong yields have on a portfolio over long time frames, it becomes clear that yield-centric investing is still very much competitive with traditional portfolio techniques, if not a more optimal path.
So, while dividends might have lost some of their luster in the recent market environment, the history of dividend-focused portfolios is hard to ignore. Even in a tech-focused market, dividends still matter and may be not only vital contributors to gains, but often times, potentially the difference between outperformance and poor returns.