The Defensive Characteristics of Dividend Investing

Anchor Capital’s research shows that high dividend yielding stocks, on average, outperform others both in down markets and historically. Using proprietary screens, we examined the stock performance of dividend and non-dividend paying stocks during the severe market downturn of 2008 and also over the course of a market cycle. We found that in both scenarios, on average, dividend-paying stocks’ total return was greater than that of non-dividend paying stocks.

We observed the price performance of stocks with above-market yield, below market yield and no yield during 2008, a year in which the S&P 500 fell 38.5%i . The average dividend yield of S&P 500 stocks at yearend 2007 was 1.87%, which we consider to be the Market Yieldii . Companies with yields above 1.87% at that time are considered “above market yield,” those with yields below 1.87% are “below market yield” and those that pay no dividend are referred to as “no yield.” The population examined includes U.S. companies that had market capitalizations over $500 million on December 31, 2007 and that still exist today. The stock price performance results below, which do not include dividend reinvestment, clearly show that above-market yielding stocks provide the most protection, followed by lower yielding stocks.

Dividend-paying stocks also provide a source of income, which on a total return basis offers even more protection in a down market. The average total return for high yielding stocks was -28% in 2008, as displayed in the far right column, significantly exceeding the average -32% change in the stock prices.

The Defensive Characteristics of Dividend Inves

Our research further showed that dividend-paying stocks’ average total return outperformed over a market cycle (October 2007 through August 2016). The same group of stocks that paid a dividend over the market yield at yearend 2007 generated total returns greater than those with no dividends and also those with below-market yields.

The Defensive Characteristics of Dividend Inves

Dividends, in fact, contribute to almost half of S&P 500 returns for the period between 1926 and 2015. The exhibit below shows how much dividends added to the S&P 500’s average annual total return during each of the last nine decades. As seen in the last column, dividends added on average 4.0% or 42% of the 9.8% annual average return of the S&P 500 from 1926 to 2015v .

The Defensive Characteristics of Dividend Inves

Anchor’s investment philosophy is to provide clients with superior returns in down markets and competitive returns over the course of a stock market cycle. This approach is evident in every one of Anchor’s strategies. Anchor’s Select Dividend strategy, in particular, comprised only of dividend-paying stocks, takes this investment approach to its fullest extent. Anchor’s strong preference for dividend-paying stocks reflects its commitment to provide clients with downside protection during periods of market volatility and to generate competitive long-term returns.