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Portfolio construction

Why dividends matter more than you think

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Does your portfolio have enough dividend exposure?

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.

Dividends roadmap

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Average dividend exposure

Downside protection

Durable income and inflation protection

Solution

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Average dividend exposure

Limited exposure to dividend payers for income goals versus American Funds Model Portfolios

Equity yield exposure

These charts show equity yield exposure for 2,127 professionally managed portfolios analyzed by the Capital Group Portfolio Consulting and Analytics team from January 1, 2021 to December 31, 2021. The first chart shows that average allocations to higher dividend payers yielding above 0.7% did not substantially increase as portfolios became more conservative; equity yield allocations ranged from 54%–62%. The second chart shows that equity yield exposures for American Funds Model Portfolios increased from 40% to almost 90% as portfolios became more conservative.

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.

“Capital Group takes a nuanced approach to asset allocation with a recharacterization of both equity and fixed income securities as portfolio objectives change. Shifting to higher dividend payers can have a significant impact on your portfolio, offering potential for better downside capture, increased inflation protection and diversified income sources.”

 

—MIA YAMMINE

Portfolio consultant

downside protection

Potential for better downside capture

30-year downside capture* across dividend buckets

This chart shows that higher dividend payers showed significantly more attractive 30-year downside capture versus the S&P 500 Index, according to analysis from Fama and French from 12/31/91 to 11/30/21. Thirty-year downside capture for the top 30% highest yielding dividend payers for the period was 76% relative to the S&P 500 Index, 88% for the middle 40% of dividend payers, 108% for the lowest 30% of dividend payers and 124% for non-dividend payers.

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.

How well have your funds fared in major market corrections?

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durable income and inflation protection

Quality matters

Equity and fixed income yields based on credit quality

The first chart shows that higher rated companies had higher dividend yields than lower rated ones. AAA-rated companies had a dividend yield of 1.57% as of December 31, 2021, while yield for AA-rated companies was 1.60%, A-rated companies was 1.95%, and BBB-rated was 1.73%, versus BB-rated yields at 0.94% and B at zero. The second chart shows that bond yields steadily increased as credit quality went down. In the second chart, yield for AAA-rated bonds was 1.28%, AA-rated was 1.96%, A was 2.11%, BBB was 2.57%, BB was 3.30% and B was 4.57%.

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.

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durable income and inflation protection

Inflation protection over the long run

30-year average annual dividend growth for the S&P 500 Index and Washington Mutual Investors FundSM (WMIF) versus the Consumer Price Index (CPI)

This chart shows that 30-year annual dividend growth for the S&P 500 Index was 5.56% and 5.05% for Washington Mutual Investors Fund versus 2.40% for the Consumer Price Index as of December 31, 2021.

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.

“Because [dividend payers] are committed to setting aside some proportion of their earnings for investors, they tend to have better discipline and may be less likely to make some ill-advised acquisition.”

 

—JOYCE GORDON

Portfolio manager

Is your portfolio short on dividend payers?

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solution

Focus on dividend-oriented funds and models

Challenge

Insufficient dividend exposure to meet clients’ income and preservation goals.

Solution

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.

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Spotlight on Washington Mutual Investors Fund

Substantial dividend growth

WMIF has seen dividend income increases in 66 out of 68 years.*

Attractive downside capture

WMIF

  • 5-year: 93%
  • 10-year: 91%
  • 30-year: 79%

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.

Washington Mutual Investors Fund

Learn more about WMIF

Portfolio Construction Concepts

PORTFOLIO CONSTRUCTION

Delving into small caps

Model portfolios are only available through registered investment advisers. This content is intended for registered investment advisers and their clients.
Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Investing for short periods makes losses more likely. View model returns. View mutual fund expense ratios and returns.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Model portfolios are subject to the risks associated with the underlying funds in the model portfolio. Investors should carefully consider investment objectives, risks, fees and expenses of the funds in the model portfolio, which are contained in the fund prospectuses.
Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.
Nondiversified funds have the ability to invest a larger percentage of assets in the securities of a smaller number of issuers than a diversified fund. As a result, poor results by a single issuer could adversely affect fund results more than if the fund invested in a larger number of issuers. See the applicable prospectus for details.
There have been periods when the results lagged the index(es) and/or average(s). The indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. Index/Index blends for Capital Group/American Funds Model Portfolios are those that the Portfolio Solutions Committee believes most closely approximate the investment universe of a given model portfolio. The index/index blends do not specifically represent the benchmarks of the underlying funds in the American Funds model portfolio.
MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). Bloomberg or Bloomberg's licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg's licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
Each S&P Index ("Index") shown is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part is prohibited without written permission of S&P Dow Jones Indices LLC.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Portfolios are managed, so holdings will change. Certain fixed income and/or cash and equivalents holdings may be held through mutual funds managed by the investment adviser or its affiliates that are not offered to the public.
Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.
Model portfolios are provided to financial intermediaries who may or may not recommend them to clients. The portfolios consist of an allocation of funds for investors to consider and are not intended to be investment recommendations. The portfolios are asset allocations designed for individuals with different time horizons, investment objectives, and risk profiles. Allocations may change and may not achieve investment objectives. If a cash allocation is not reflected in a model, the intermediary may choose to add one. Capital Group does not have investment discretion or authority over investment allocations in client accounts. Rebalancing approaches may differ depending on where the account is held. Investors should talk to their financial professional for information on other investment alternatives that may be available. In making investment decisions, investors should consider their other assets, income, and investments. Visit capitalgroup.com for current allocations.
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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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.