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2021 Insight

The Power of 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 -Term View -paying 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 . Payout Ratio: A Critical Metric Do Dividend Policies Affect 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 . 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 . 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 -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 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, 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 rather than returning it to . Significant 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 .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 for the S&P 500 Index from 1960– 2020. According to Yale, the median 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

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 may make the mistake 14 of simply choosing those that offer the highest yields possible. A study 13 conducted by Wellington 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 ? 6 5 performed as well as We’ll answer these questions in a moment, but we’ll begin by summarizing BBlack 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. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. The second-quintile stocks outperformed the S&P 500 Index seven out of the ten time periods (1930 to 2020), or 77.8% of the time, while first- and third-quintile stocks tied for second, beating the Index 66.7% of the time. Fourth- and fifth-quintile stocks lagged behind by a significant .

FIGURE 5 Compound Annual Growth Rate (%) for US Stocks by Dividend Yield Quintile by Decade (1929–2020)

S&P 500 1st Quintile 2nd Quintile 3rd Quintile 4th Quintile 5th Quintile Jan-1930 to Dec-1939 -0.20 -2.36 0.61 -2.34 -0.38 2.07 Jan-1940 to Dec-1949 9.51 13.92 13.06 10.26 8.63 6.83 Jan-1950 to Dec-1959 18.33 18.52 20.31 18.47 16.57 19.81 Jan-1960 to Dec-1969 8.26 8.82 8.90 6.46 7.97 9.30 Jan-1970 to Dec-1979 6.05 9.67 10.22 7.00 7.57 3.94 Jan-1980 to Dec-1989 16.80 20.23 19.62 17.20 16.19 14.65 Jan-1990 to Dec-1999 17.96 12.37 15.54 15.06 18.10 18.93 Jan-2000 to Dec-2009 -0.44 5.57 4.15 4.21 1.99 -1.75 Jan-2010 to Dec-2019 13.65 12.98 13.25 14.15 13.68 10.85 Jan-2020 to Dec-2020 18.40 -4.90 4.70 5.28 32.50 24.87

Data Sources: Wellington Management and Hartford Funds, 2/21. US stocks are represented by the S&P 500 Index. Chart represents the compound annual growth rate (%) for US stocks by dividend yield quintile by decade from 1930-2019 and January 2020-December 2020. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

4 Insight

Payout Ratio: A Critical Metric The best way to One reason why second-quintile dividend stocks came out ahead is because the first-quintile’s excessive dividend payouts haven’t always measure whether a been sustainable. The best way to measure whether a will be able to pay a consistent dividend is through the payout ratio. company will be able The payout ratio is calculated by dividing the yearly dividend per share by to pay a consistent the . A high payout ratio means that a company is using a significant percentage of its earnings to pay a dividend, which leaves dividend is through them with less to invest in future growth of the business. the payout ratio. The chart below illustrates the average since 1979 for the first two quintiles of dividend payers within the Russell 1000 Index.3 The first-quintile stocks had an average dividend payout ratio of 74%, while the second quintile had a 41% average payout ratio. A payout ratio of 74% could be difficult to sustain if a company experiences a drop in earnings. Once this happens, a company could be forced to cut its dividend. A dividend cut is often viewed as a sign of weakness in the financial markets and frequently results in a decline in the price of the company’s stock.

FIGURE 6 Average Dividend Payout Ratio (1/31/79-12/31/20)

74% 1st Quintile

2nd Quintile 41%

Data Sources: Wellington Management and Hartford Funds, 2/21. Payout ratios illustrated are for stocks within the Russell 1000 Index. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

70%

47%

3 The Russell 1000 Index measures the performance of the large-cap segment of the US universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership.

5 Insight

Do Dividend Policies Affect Stock Performance? In an effort to learn more about the relative performance of companies according to their dividend policies, Ned Davis Research conducted a study in which they divided companies into two groups based on whether or not they paid a dividend during the previous 12 months. They named these two groups “dividend payers” and “dividend non-payers.” The “dividend payers” were then divided further into three groups based on their dividend payout behavior during the previous 12 months. Companies that kept their dividends per share at the same level were classified as “no change.” Companies that raised their dividends were classified as “dividend growers and initiators.” Companies that lowered or eliminated their dividends were classified as “dividend cutters or eliminators.” Companies that were classified as either “dividend growers and initiators” or “dividend cutters and eliminators” remained in these same categories for the next 12 months, or until there was another dividend change. For each of the five categories (dividend payers, dividend non-payers, dividend growers and initiators, dividend non-payers, and no change in ) a total-return geometric average was calculated; monthly rebalancing was also employed. It’s important to point out that our discussion is based on historical information regarding different stocks’ dividend-payout rates. Such past performance can’t be used to predict which stocks may initiate, increase, Companies that decrease, continue, or discontinue dividend payouts in the future. grew or initiated Based on the Ned Davis study, it’s clear that companies that cut their dividends suffered negative consequences. InFIGURE 7, dividend a dividend have cutters and eliminators (e.g., companies that completely eliminated their dividends) were more volatile (as measured by beta4 and standard experienced the deviation5) and fared worse than companies that maintained their dividend policy. highest returns

Lowest Risk and Highest Returns for Dividend Growers & Initiators relative to other In contrast to companies that cut or eliminated their dividends, companies stocks since 1973— that grew or initiated a dividend have experienced the highest returns relative to other stocks since 1973—with significantly less . This with significantly less helps explain why so many financial professionals are now discussing the benefits of incorporating dividend-paying stocks as the core of an equity volatility. portfolio with their clients.

FIGURE 7 Average Annual Returns and Volatility by Dividend Policy S&P 500 Index 1973-2020

Standard Returns Deviation Dividend Growers & Initiators 13.20% 0.88 16.08% Dividend Payers 12.83% 0.94 16.81% No Change in Dividend Policy 10.97% 1.00 18.58% Dividend Non-Payers 12.18% 1.18 22.12% Dividend Cutters & Eliminators 10.20% 1.18 24.47% Equal-Weighted S&P 500 Index 12.57% 1.00 17.41%

Data Sources: Ned Davis Research and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only. 4 Beta is a measure of risk that indicates the price sensitivity of a or a portfolio relative to a specified market index. 5 Standard deviation measures the spread of the data from the mean .

6 Insight

Dividend Growth May Be a Key to Outperformance on corporate balance sheets (FIGURE 9). This excess that consistently grow their dividends cash should allow businesses with existing dividends have historically exhibited strong fundamentals, to maintain, if not grow, their dividends. Interest rates solid business plans, and a deep commitment to their are likely to stay historically low for some time, meaning shareholders. dividend-paying stocks continue to offer attractive yields relative to many fixed-income asset classes. The market environment is also supportive of dividends. A strong US economy has helped companies grow earnings and free cash flow, resulting in record levels of

FIGURE 8 Fig 8 Fig 1 Returns of S&P 500 Index Stocks by Dividend Policy: Growth of $100 (1973–2020) $12,000 n Dividend Growers $11,346 & Initiators $11,000 $4,000,000 $3,845,730 I S&P 500 Index Total Return (Reinvestingn Dividends Dividend) Payers $10,000 $3,500,000 $3,500,000 I S&P 500 Index Price Only (No Dividends) n Equal-Weighted $9,000 Fig 8 I S&P 500 Total Return (Reinvesting Dividends) Fig 1 $3,000,000 S&P 500 Index $3,000,000 I S&P 500 Price Only (No Dividends) $8,000 $12,000 $2,500,000 n No Change $11,346 $2,500,000 $11,000 $2,000,000 in Dividend Policy $7,000 $6,946 $4,000,000 $3,845,730 $2,000,000 I S&P 500 Index Total Return (Reinvesting$6,000 Dividends) $10,000 $1,500,000 $3,500,000n Dividend Non-Payers $3,500,000 I S&P 500 Index Price Only (No Dividends) $1,500,000 $9,000 I S&P 500 Total Return (Reinvesting Dividends) $1,000,000 n Dividend Cutters $5,000 $3,000,000 $3,000,000 I S&P 500 Price Only (No Dividends) $627,161 $8,000 $1,000,000 $500,000 $2,500,000 & Eliminators $4,000 $3,764 $2,500,000 $2,000,000 $7,000 $6,946 $500,000 $0 $3,000 $2,000,000 1960 1970 1980 1990 2000 2010 2019 2020 $1,500,000Data Sources: $6,000 $0 $2,000 $2,189 $1,500,000 $1,000,000Ned Davis Research and $5,000 Hartford Funds, 2/21. $1,000 $627,161 $1,000,000 $500,000 $4,000 $844 Fig 2 $3,764 $56 $500,000 $0 $0 $3,000 1960 1970 1980 1990 2000 2010 2019 2020 Fig 12 1972 1982 1992 2002 2020 $0 I S&P 500 Index Dividend Contribution to Total Return $2,189 I S&P 500 Index Price Only (No Dividends) $2,000 Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For 20% 80% $1,000 $844 illustrative purposesAverage only. 30% Fig 2 16% for All Fig 9 $0 $56 15% 28% Decades 70% Fig 12 1972 1982 1992 2002 2020 I S&P 500 Index Dividend17% Contribution to Total Return I S&P 500 Index Price Only (No Dividends) 10% 20% 60% 80% 41% $3,000 The Future for Dividend Investors Average FIGURE 9 67% 44% 30% 16% erage annual total return for All Fig 9

Av 5% 28% Decades 70% 73% 15%Trend 1: High Corporate Cash Could Bode Well for Dividends Record Levels of Cash on Corporate Balance Sheets NA* $2,500 50% In the aftermath of the , corporations17% have (1945–2020) 0% 10% 60% 1940s 1950s 1960s 1970s 1980s 1990sbeen2000s accruing2010s record1930- profits, and their$2,000 balance41 %sheets have $3,000 2020 67% 44% erage annual total return swelled as a result. Cash on corporate balance sheets has 40%

Av 5% 73% more than doubled since the early 2000’s.NA$1,500* Corporations can $2,500 50% use0% this excess cash in a variety of ways, such as expanding 30% Fig 3 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 1930- $2,000 their businesses or making acquisitions.$1,000 While these2020 40% $1,500 options may be attractive in some environments, during 20% $500 uncertain times some corporations may be more cautious 30% Fig 3 $1,000 and choose to hold on to their cash in case of another Billionsin $0 10% 20% economic downturn. Companies may also choose1945 to1955 use 1965 1975$500 1985 1995 2005 3Q2020 excess cash to initiate a dividend or increase their existing dividend payouts. $0 0% 10% 1945 1955 1965 1975 1985 1995 2005 3Q2020 1972 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Fig 10 0% Data Sources: and Hartford Funds, 2/21. 1972 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 $140 Fig 10

$120 $140

7 $100 $120

$100 Fig 4 $80

Fig 4 $80 $60 $60 $40 $40 $20 $20

$0 400% $0 360% 400% 360% 320% 320% 280% 280% 240% 240% 200% 200% 160% 160% 120% 120% 80% 80% 40% 40% 0% 0% 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2020 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 $2,500,000 $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

$1,000 $844 Fig 2 $0 $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)

20% 80%

Average 30% 16% for All InsightFig 9 15% 28% Decades 70%

17%

10% 60% 41% $3,000 67% 44% erage annual total return

Av 5% 73% NA* FIGURE 10 shows the$2,500 confluence of two positive trends that could benefit High corporate50% profits 0% dividend investors: high corporate profits for S&P 500 Index companies 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 1930- $2,000 coupled2020 with near record-low payout ratios. The average dividend payout and near40% record-low ratio over the past 94$1,500 years has been 56.8%. As of December 31, 2020, the payout ratios30% could Fig 3 payout ratio stood at$1,000 just 61.2%—leaving plenty of room for growth.

benefit dividend20% $500

$0 investors.10% 1945 1955 1965 1975 1985 1995 2005 3Q2020 FIGURE 10 S&P 500 Index Dividend Payout Ratio Quarterly Data (log scale) 0% 1972 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Fig 10 (3/31/1926–12/31/2020)

$140

GAAP Reported Earnings Per Share = $95.22 $120 Dividends Per Share = $58.28 $100

Fig 4 $80

$60

$40

$20

$0 400% 360% 320% Average Dividend Payout Ratio = 56.8% 280% Dividend Payout Ratio = 61.2% 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

n S&P 500 Index GAAP Reported Earnings Per Share n Dividend Payout Ratio % (Trailing 4Q Cash Dividends/ n S&P 500 Dividends Per Share Trailing 4Q Reported Earnings) n Average Dividend Payout Ratio

Data Sources: Ned Davis Research and Hartford Funds, 2/21. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

8 Insight

Trend 2: Low Yields Could Bode Well for Dividends Retiring baby boomers With bond yields still at relatively low levels, dividend-paying stocks may be appealing to many investors who are seeking yield. For example, who are searching retiring baby boomers who are searching for income-producing investments and institutional investors seeking yield may find dividend for income-producing stocks more attractive than today’s low-yielding bonds. investments and FIGURE 11 institutional investors Yields for US Stocks Compare Favorably to Corporate Bonds (1901–2020) seeking yield may find

15% dividend stocks more

n Yield attractive than today’s 12% n US Stock Yield low-yielding bonds.

9%

6%

3%

0% Fig 8 1901 1921 1941 1961 1981 2001 2020 Fig 1 $12,000 $11,346 Data Sources: Bond Data - S&P High Grade Corporate Bond Index (1901-1968), $11,000 Citigroup High Grade Corporate Bond Index (1969-1972, Barclays Capital Govt/Corp $4,000,000 $3,845,730 I S&P 500 Index Total Return (Reinvesting Dividends) $10,000 Bond Index (1973-1975), Barclays US Aggregate Bond Index (1976-2020); Stock Data $3,500,000 $3,500,000 I S&P 500 Index Price Only (No Dividends) $9,000 - Cowles Commission All StocksI S&P 500 Index Total Return (1901-1925), (Reinvesting Dividends)S&P 500 Index (1926-2020); and $3,000,000 $3,000,000 Hartford Funds. I S&P 500 Price Only (No Dividends) $8,000 $2,500,000 $2,500,000 $2,000,000 $7,000 $6,946 As of December 31, 2020, 69% of the stocks in the S&P 500 Index have $2,000,000 $1,500,000 $6,000 dividend yields higher than the 10-Year US Treasury—that number being $1,500,000 $1,000,000 $5,000 one of the highest on record. There have been seven calendar years that $627,161 $1,000,000 $500,000 ended with more than 40% of S&P 500 Index stocks yielding more than $4,000 $3,764 $500,000 $0 $3,000 bonds. Of those years, only one—1974—was prior to 2008 (see FIGURE 12). 1960 1970 1980 1990 2000 2010 2019 2020 $0 $2,000 $2,189 FIGURE 12 $1,000 $844 Fig 2 Percentage of S&P 500 Stocks with Dividend Yields Greater than $0 $56 Fig 12 1972 1982 1992 2002 2020 10-Year Treasury Yields (1972–2020) 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%

10% 60% 41% $3,000 67% 44% erage annual total return

Av 5% 73% NA* $2,500 50%

0% 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 1930- $2,000 2020 40% $1,500 30% Fig 3 $1,000

20% $500 Circles represent year-end values, as of 1974, 2008, $0 10% 2011, 2012, 2015, 2019, and 2020. Data Sources: 1945 1955 1965 1975 1985 1995 2005 3Q2020 Ned Davis Research and Hartford Funds, 2/21. Past 0% performance does not guarantee future results. 1972 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Fig 10 Indices are unmanaged and not available for direct investment. For illustrative purposes only. $140

$120 9 $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 Insight

Trend 3: Financial Repression and Institutional Investors The US Federal Reserve (Fed) held interest rates low in the aftermath of Low interest rates the Great . They attempted to normalize rates from 2015-2018, make it easier for the then cut them again in 2019 and 2020. The Fed has stated their intention to keep rates low at least until 2022. US government to We generally think of as a catalyst to help accelerate or make payments on decelerate economic activity, but it can also be used for other purposes. By keeping interest rates low, the Fed helps keep interest payments on outstanding , the national debt low. In other words, low interest rates benefit not only businesses and consumers who want to borrow money, but also the and these lower debt biggest debtor in the world: the US government. payments make severe Low interest rates benefit debtors and punish savers. Investors who have money in CDs,6 funds,7 and savings accounts8 are receiving austerity measures startlingly low rates. Meanwhile, low interest rates make it easier for the US government to make payments on outstanding debt. These lower debt less necessary in the payments make severe austerity measures less necessary in the short term. term. But the burgeoning level of US could one day lead to severe austerity measures. Low interest rates are especially problematic for institutional investors. How long can a plan with an actuarial discount rate of 6% or higher continue to accept 10-Year US Treasury Bonds9 that yield around 1.5%? Institutional investors who have identified the trend toward financial repression have numerous options, including high-yield bonds,10 ,11 sovereign debt of foreign countries,12 REITs,13 and dividend-paying stocks.14 In fact, since 2008, institutional investors have poured nearly $84 billion into equity-income funds while individual investors have withdrawn nearly $103 billion from them over the same time period (see FIGURE 13). It’s not uncommon for institutional investors to be ahead of the general public when it comes to investing, but how long will this striking disparity last?

6 A CD () is a savings certificate entitling the 11 Bank loans are below-investment-grade, senior secured, short- bearer to receive interest. A CD bears a maturity date, a specified term loans made by to corporations. They are rated below- fixed and can be issued in any denomination. CDs investment-grade because there is a greater possibility that the are insured up to $250,000 per depositor by the Federal Deposit may be unable to make interest and principal payments on (FDIC) or the National Union those securities. Association (NCUA). 12 A is a bond issued by a national government 7 Money market funds are not insured or guaranteed by the denominated in the country’s own . Bonds issued by Federal Deposit Insurance Corporation (FDIC) or any other national governments in foreign are normally referred government agency. Although the funds seek to preserve the to as sovereign bonds. Timely payment of interest and principal value of the investment at $1.00 per share, it is possible to lose payments on sovereign debt is dependent upon the issuing money by investing in the funds. nation’s future economic health and taxing power. 8 A savings account is an account provided by a bank for individuals 13 A REIT, which stands for Investment Trust, is a company to save money and earn interest on the cash held in the account. that owns or manages income-producing real estate. REITs are Savings accounts are typically insured by the Federal Deposit dependent upon the financial condition of the underlying real Insurance Corporation (FDIC). estate. Risks associated with REITs include credit risk, liquidity risk, 9 US Treasury Bonds are backed by the US government and are and interest-rate risk. guaranteed as to the timely payment of principal and interest. This 14 A stock is an instrument that signifies an guarantee does not apply to the value of fund shares. (called equity) in a corporation, and represents a claim on its 10 High-yield securities, or “junk bonds,” are rated below-investment- proportional share in the corporation’s assets and profits. grade because there is a greater possibility that the issuer may Dividends are a distribution of a portion of a company’s earnings, be unable to make interest and principal payments on those decided by the , to a class of its shareholders. securities. There are no guarantees connected with the dividend payouts for dividend-paying stocks.

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FIGURE 13 Institutional Investors Have Gravitated to Equity-Income Mutual Funds While Individual Investors Have Fled Them Cumulative Net Asset Flows (2008–2020)

100 80 60 40 20 0 -20 -40 Billions ($) Billions -60 -80 -100 Institutional -120 -140 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Sources: Morningstar and Hartford Funds, 2/21. Flows into the equity income category can vary significantly from year to year as different funds move in and out of the category.

Summary Dividends have historically played a significant role in total Trends that bode well for dividend-paying stocks include return, particularly when average annual equity returns historically high levels of corporate cash, historically low have been lower than 10% during a decade. bond yields, and baby boomers’ demand for income that will last throughout . Stocks in the highest quintile of dividend yields have historically underperformed stocks in the second Today’s interest rates are leading to financial repression quintile. Therefore, investors should only use yield as as a way for the US government to help reduce the one consideration when selecting a dividend-paying deficit without severe austerity measures. This has led investment. institutional investors to invest heavily in dividend- paying stocks and strategies, which has helped bolster Furthermore, dividend growers and initiators have their performance. This trend shows no sign of abating historically provided greater total return with less volatility as long as interest rates continue to remain relatively low, relative to companies that either maintained or cut their and demand for these investments will only grow if retail dividends. investors follow the lead of institutional investors.

Talk to your financial professional about the benefits of incorporating dividend-paying stocks into your portfolio.

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Hartford Funds Dividend-Paying Funds

Class I Ticker Hartford Equity Income HQIIX Hartford Dividend and Growth HDGIX Hartford Balanced Income HBLIX

Investors should carefully consider a fund’s investment This information should not be considered investment advice or a objectives, risks, charges, and expenses. This and other important recommendation to buy/sell any security. In addition, it does not information is contained in a fund’s full prospectus and summary take into account the specific investment objectives, and financial prospectus, which can be obtained by visiting hartfordfunds.com. condition of any specific person. This information has been prepared Please read it carefully before investing. from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its Important Risks: Investing involves risk, including the possible loss contents are current at the time of writing and are subject to change of principal. • There is no guarantee a fund will achieve its stated without notice. objective. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual Mutual funds are distributed by Hartford Funds Distributors, LLC companies. • security risks include credit, liquidity, (HFD), Member FINRA. Advisory services are provided by Hartford call, duration, and interest-rate risk. As interest rates rise, bond Funds Management Company, LLC (HFMC). Certain funds are prices generally fall. • For dividend-paying stocks, dividends are not sub-advised by Wellington Management Company LLP. HFD and HFMC guaranteed and may decrease without notice. • Foreign investments are not affiliated with any sub-adviser. may be more volatile and less liquid than U.S. investments and are WP106_0321 222399 subject to the risk of currency fluctuations and adverse political and economic developments. • Different investment styles may go in and out of favor, which may cause a fund to underperform the broader .

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