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The Power of Dividends Past, Present, and Future

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2021 Insight The Power of Dividends Past, Present, and Future IN THE 1990 FILM “CRAZY PEOPLE,” AN ADVERTISING EXECUTIVE Inside: DECIDES TO CREATE A SERIES OF TRUTHFUL ADS. One of the funniest ads says, “Volvo—they’re boxy but they’re good.” The Long-Term View Dividend-paying stocks are like the Volvos of the investing world. They’re Decade By Decade: How not fancy at first glance, but they have a lot going for them when you Dividends Impacted Returns look deeper under the hood. In this insight, we’ll take a historical look at When “High” Beat “Highest” dividends and examine the future for dividend investors. Payout Ratio: A Critical Metric Do Dividend Policies Affect Stock The Long-Term View Dividends have played a significant role in the returns investors have FPO Performance? - update received during the past 50 years. Going back to 1970, 84% of the total Lowest Risk and Highest Returns 1 for Dividend Growers & Initiators return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding, as illustrated in FIGURE 1. The Future for Dividend Investors Fig 8 Fig 1 FIGURE 1 The Power of Dividends and Compounding $12,000 Growth of $10,000 (1960–2020) $11,346 $11,000 $4,000,000 $3,845,730 I S&P 500 Index Total Return (Reinvesting Dividends) $10,000 $3,500,000 $3,500,000 I S&P 500 Index Price Only (No Dividends) $9,000 I S&P 500 Total Return (Reinvesting Dividends) $3,000,000 $3,000,000 I S&P 500 Price Only (No Dividends) $8,000 $2,500,000 $2,500,000 $2,000,000 $7,000 $6,946 $2,000,000 $1,500,000 $6,000 $1,500,000 $1,000,000 $5,000 $627,161 $1,000,000 $500,000 $4,000 $3,764 $500,000 $0 $3,000 1960 1970 1980 1990 2000 2010 2019 2020 $0 $2,000 $2,189 Data Sources: Morningstar and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for $1,000 $844 Fig 2 direct investment. For illustrative purposes only. Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising $0 $56 Fig 12 market. 1972 1982 1992 2002 2020 I S&P 500 Index Dividend Contribution to Total Return I S&P 500 Index Price Only (No Dividends) 20% 80% Average 30% 16% for All Fig 9 15% 28% Decades 70% 17% 1 S&P 500 Index is a market capitalization-weighted price index composed of 500 10% 60% widely held common stocks. Indices are unmanaged and not available for41 %direct $3,000 investment.67% 44% erage annual total return Av 5% 73% NA* $2,500 50% 1 0% 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 1930- $2,000 2020 40% $1,500 30% Fig 3 $1,000 20% $500 $0 10% 1945 1955 1965 1975 1985 1995 2005 3Q2020 0% 1972 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Fig 10 $140 $120 $100 Fig 4 $80 $60 $40 $20 $0 400% 360% 320% 280% 240% 200% 160% 120% 80% 40% 0% 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2020 Fig 8 Fig 1 $12,000 $11,346 $11,000 $4,000,000 $3,845,730 I S&P 500 Index Total Return (Reinvesting Dividends) $10,000 $3,500,000 $3,500,000 I S&P 500 Index Price Only (No Dividends) $9,000 I S&P 500 Total Return (Reinvesting Dividends) $3,000,000 $3,000,000 I S&P 500 Price Only (No Dividends) $8,000 $2,500,000Insight $2,500,000 $2,000,000 $7,000 $6,946 $2,000,000 $1,500,000 $6,000 $1,500,000 $1,000,000Decade By Decade: How Dividends Impacted Returns $5,000 Looking at average stock performance over a longer time frame provides$627,161 $1,000,000 $500,000 a more granular perspective. From 1930–2020, dividend income’s $4,000 $3,764 $500,000 contribution$0 to the total return of the S&P 500 Index averaged 41%. Looking $3,000 1960 1970 1980 1990 2000 2010 2019 2020 at S&P 500 Index performance on a decade-by-decade basis shows how $0 $2,189 dividends’ contribution varied greatly from decade to decade. $2,000 FIGURE 2 Dividends$1,000 were $844 Fig 2 Dividends’ Contribution to Total Return Varies By Decade de-emphasized$0 in the $56 Fig 12 1972 1982 1992 2002 2020 I S&P 500 Index Dividend Contribution to Total Return I S&P 500 Index Price Only (No Dividends) 1990s, but after the 20% 80% Average dot-com bubble burst, 30% 16% for All Fig 9 15% 28% Decades investors once again 70% 17% 10% turned their attention to 60% 41% $3,000 67% 44% erage annual total return dividends. Av 5% 73% NA* $2,500 50% 0% 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 1930- $2,000 2020 40% $1,500 Data Sources: Morningstar and Hartford Funds, 2/21. *Total return for the S&P 500 30% Index was negative for the 2000s. Dividends provided a 1.8% annualized return Fig 3 $1,000 over the decade. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only. 20% $500 Dividends played a large role in terms of their contribution to total returns during the 1940s, 1960s, and 1970s, decades in which total returns were $0 10% lower than 10%. By contrast, dividends played a smaller role during the 1945 1955 1965 1975 1985 1995 2005 3Q2020 1950s, 1980s, and 1990s when average annual total returns for the decade were well into double digits. 0% During the 1990s, dividends were de-emphasized. At the time, companies 1972 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 thought they were better able to deploy their capitalFig by 10reinvesting it in their businesses rather than returning it to shareholders. Significant capital appreciation year in and year out caused investors to shift their attention$140 away from dividends. From 2000 to 2009, a period often referred to as the “lost decade,” $120the S&P 500 Index produced a negative return. Largely as a result of the bursting of the dot-com bubble in March 2000, stock investors once$100 again turned to fundamentals such as P/E ratios2 and dividend yields. Fig 4 $80 $60 $40 $20 $0 400% 360% 320% 2 Price/earnings “P/E” ratio is the ratio of a stock’s price to its earnings per share.280% 240% 200% 2 160% 120% 80% 40% 0% 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2020 Insight FIGURE 3 summarizes the dividend yield for the S&P 500 Index from 1960– 2020. According to Yale, the median dividend yield for the entire period was 2.92%, with yields peaking in the 1980s and bottoming in the 2000s. Today, investors continue to place a high premium on the more tangible and immediate returns that dividends provide. FIGURE 3 The S&P 500 Index’s Yield Has Been Relatively Stable Over the Past Decade S&P 500 Index Dividend Yield (1960–2020) 7 7 7 6 6 6 5 5 4 4 5 3 3 4 2 2 3 1 1 2 Black Monday 0 0 1960 1970 1980 1990 2000 2010 2020 1 Data Sources: Yale and Hartford Funds, 2/21. Past performance does not guarantee 0 future results. Indices are unmanaged and not available for direct investment. For 1970 1980 1990 2000 2010 2015 illustrative purposes only. When “High” Beat “Highest” Investors seeking dividend-paying investments may make the mistake 14 of simply choosing those that offer the highest yields possible. A study 13 conducted by Wellington Management reveals the potential flaws in this thinking. 12 11 The study found that stocks offering the highest level of dividend payouts 10 Stocks offering the have not performed as well as those that pay high, but not the very 9 highest, levels of dividends. highest level of dividend 8 This conclusion is counterintuitive: Why wouldn’t the highest-yielding 7 stocks have the best historical total returns? Isn’t the ability to pay a payouts have not generous dividend a sign of a healthy underlying business? 6 5 performed as well as We’ll answer these questions in a moment, but we’ll begin by summarizing BlackB Mondayo 4 the methodology and findings of the study. those that pay high, but Black Tuesday 3 Wellington Management began by dividing dividend-paying stocks into 2 not the very highest, quintiles by their level of dividend payouts. The first quintile (i.e., top 20%) 1 consisted of the highest dividend payers, while the fifth quintile levels of dividends. 0 (i.e., bottom 20%) consisted1880 1890 of the1900 lowest1910 dividend1920 payers.1930 1940 1950 1960 1970 1980 1990 2000 2010 2015 3 90% 70% 40% 40% 30% 1st 2nd 3rd 4th 5th Quintile Quintile Quintile Quintile Quintile Insight FIGURE 4 summarizes the performance of the S&P 500 Index as a whole relative to66. each7% quintile77.8% over the66. past7% eight 44.4decades.% 44.4% FIGURE 4 Second-Quintile Stocks Outperformed Most Often From 1930–2020 Percentage of Time Dividend Payers by Quintile Outperformed the S&P 500 Index (summary of data in FIGURE 5) 77.8% 66.7% 66.7% 44.4% 44.4% 1st Quintile 2nd Quintile 3rd Quintile 4th Quintile 5th Quintile Data Sources: Wellington Management and Hartford Funds, 2/21.
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