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Companies that offer higher dividends and more sustainable dividend growth can provide significant downside protection and help guard against inflation. Yet the Capital Group Portfolio Consulting and Analytics team found that most portfolios showed a minimal increase in higher dividend payers as portfolios became more conservative. Here’s why we think it’s time to take a close look at dividends.
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The Capital Group Portfolio Consulting and Analytics team analyzed 2,127 portfolios in consultation with financial professionals from January 1, 2021 to December 31, 2021. During these consultations, portfolio objectives were discussed and aligned to the American Funds Model Portfolio objectives. The American Funds Model Portfolios include a suite of models with objectives ranging from growth and growth & income to income and preservation.
Most income-focused portfolios managed by financial professionals have limited exposure to dividend payers based on our analysis. We suggest rethinking this and recommend increasing dividend allocations for certain client goals. For example, American Funds Model Portfolios have significantly higher allocations to substantial dividend payers in growth & income and income portfolios.
Data based on annual returns from 12/31/1991–11/30/21 for a set of 3,358 companies as of 11/30/21. This universe of companies has varied during the 30-year period. Sources: Dartmouth — Fama/French, Morningstar
* Downside capture ratio measures how a fund fared relative to the index during market declines. A downside capture ratio less than a 100 indicates that a fund lost less than the index for a given period; a ratio greater than 100 indicates the fund lost more than the index.
High-dividend paying stocks have historically offered more downside protection compared to low and non-dividend payers, according to data from Fama and French. Higher dividend payers have shown more attractive 30-year downside capture, losing significantly less than the S&P 500 Index than lower dividend payers. In general, dividends can be a sign of stability for companies, with many firms recently reinstating dividends after dramatically cutting them in 2020.
Data as of 12/31/21. Sources: Bloomberg/Factset.
*Yield-to-worst is the lowest yield that can be realized by either calling or putting on one of the available call/put dates, or holding a bond to maturity. Yield-to-worst figures are a weighted average of the yield-to-worst for each credit grouping. The credit groupings are based on U.S. corporate bonds within the Bloomberg U.S. Credit and the Bloomberg U.S. Corporate High Yield indexes. Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.
Using dividends as a source of income has the potential to improve the credit quality of your investments. While higher yielding fixed income investments typically take on greater credit risk, equity investments tend to see increased yields from more highly rated companies. We take a bottom-up, fundamental approach to evaluating the quality of dividend-paying companies and the sustainability of dividend yields.
Data from 12/31/91 through 12/31/21. Source: Capital Group
Dividend income growth may help protect against rising inflation. Over the last 30 years, the dividend growth rates of both the S&P 500 and Washington Mutual Investors Fund (WMIF) — a high-quality dividend focused strategy — have significantly outpaced the Consumer Price Index (CPI). During the period of high, rising inflation from 1965–1982, CPI averaged 6.6% per year; WMIF averaged 8.7% annual dividend growth while the S&P 500 averaged 5.9%. Dividend growth can signal management’s commitment to rigorous capital allocation.
Insufficient dividend exposure to meet clients’ income and preservation goals.
Consider dividend-focused funds like Washington Mutual Investors Fund (WMIF) and Capital Group U.S. Income and Growth SMA*, as well as model portfolios that allocate to higher dividend payers for specific goals.
*The Capital Group U.S. Income and Growth SMA has a similar strategy to WMIF.
WMIF has seen dividend income increases in 66 out of 68 years.*
WMIF
Data as of December 31, 2021. Sources: Factset, Morningstar.
*Based on hypothetical initial investment of $10,000 made on December 31, 1952. Washington Mutual Investors Fund was launched on July 31, 1952. The fund's annual dividend income (excluding special dividends) has increased 66 out of 68 years through 2021.
Learn more about WMIF
The S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.
The MSCI All Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes. Results reflect dividends gross of withholding taxes through December 31, 2000, and dividends net of withholding taxes thereafter.
The Bloomberg U.S. Credit Index is a market-value weighted index that tracks the total return results of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity and quality requirements. To qualify, bonds must be SEC-registered and must be an investment grade security.
The Bloomberg U.S. Corporate High Yield Index covers the universe of fixed-rate and non-investment-grade debt.