Often times, when I meet someone new who finds out I manage investments, I am asked what I like in today’s market. That is always a tough question to answer because it depends on the individual investors’ risk profile, time horizon and other specific aspects of their personal situation. No one wants to hear me dodge the question, though, so I usually offer some generic “safe bets” to satisfy their curiosity.
In the old days, I would often tout the benefits of dividend-paying stocks. Companies that fit this criterion often have very strong balance sheets, consistent revenue and income, and strong market brands. Also, because a portion of its total return was from “income”, investors got a piece of return that they could either spend or re-invest; a nice feature for some investors like retirees. Additionally, in order to diversify stock-specific risk exposure, I recommended any of a number of passive exchange-traded funds (ETFs) that held a portfolio of dividend-paying stocks.
Through February of 2020, just before the Covid panic hit markets, the 10-year returns of dividend-paying ETFs (DVY, +13.0% the green line) did, in fact, perform very well compared to the generic S&P 500 (IVV, +13.8% the blue line) trading leads with the S&P 500 over that period of time (see chart below). Also, the dividend-paying ETF generated its return with much less risk compared to the S&P 500; a characteristic that could be useful depending upon the investors’ preference.
But, the markets are volatile and situations are dynamic. In the post-Covid period from February 2020 through to today, dividend-paying ETFs have been in- and out-of-favor (see chart below). The roller coaster started in Q2 2020 as the markets recovered from the covid shock with huge fiscal stimulus and an easing Fed. The growth sector of the S&P 500 rallied strongly due to the benefits of low rates and dividend-paying stocks also performed well but did not keep pace.
The beginning of 2022 saw the Fed begin its tightening cycle to help quell inflation and that put a hit on those same growth stocks that depended on low rates to support their price levels. But, dividend-paying stocks, due to their strong balance sheets and consistent earning potential, maintained decent performance in 2022.
Finally, in 2023 we saw a huge recovery in mega-cap tech growth stocks (the “Magnificent Seven” - Apple, Amazon, etc.) leading the charge for the S&P 500; partly due to the emergence of artificial intelligence (AI) as an impetus for potential tech mega-growth going forward.
As readers of this blog are well aware, I am a proponent of long-term strategic investing to generate returns consistent with an investor’s risk profile. I expect that high quality dividend-paying stocks will recover to provide market performance comparable to the S&P 500 with less risk over time.