A Tough First Half for Dividend Investors, But the Tide Can Change Fast
The S&P 500 surged 6.5% in June to bring its year-to-date return to 16.7%. The tech-heavy Nasdaq has done even better, notching its best first half of a year since 1983 with a 32% gain.
While skepticism surrounds the market’s rally, outside of the Great Depression, the S&P 500 has had positive returns every single year when it has gained 10% or more in the first half, per Bloomberg.
Source: Bloomberg
Maybe this time will be different as a handful of mega-cap tech stocks have driven the market’s gains, potentially making it more susceptible to a reversal (an equal-weighted version of the S&P 500 would be up a more modest 5% in 2023).
Either way, 2023 has so far proven to be a frustrating year for dividend investors. The companies in the S&P 500 that don’t pay a dividend have collectively gained about 18% in 2023, outpacing a roughly 4% advance by income-producing stocks.
Source: Wall Street Journal
Popular dividend funds such as Schwab’s U.S. Dividend Equity ETF (SCHD) and the S&P 500 High Dividend Low Volatility ETF (SPHD) have fared even worse this year, losing 2.2% and 3.6%, respectively.
Much of this divergence between dividend payers and nonpayers can be chalked up to the growing hype surrounding artificial intelligence (AI), which could brighten the prospects of certain tech stocks the most. See our June newsletter for more thoughts on that topic.
That said, no one can predict short-term performance trends with any consistency. Rotating between investment strategies doesn’t typically work well over time since performance comes in unpredictable lumps, even for the broader market.
Since 1926, the S&P 500 has produced an average annual return of around 10%. But that typical return isn’t so typical over shorter time periods. Only seven of the past 97 calendar years have had returns of 8% to 12%.
Dividend stocks will have their time in the sun again. Your guess is as good as mine on the “when”. But rotations can happen quickly as we saw in 2022, when dividend payers outperformed the S&P 500 by double-digits as interest rates rose, speculative behavior declined, and investors flocked to more defensive companies that generate cash.
Owning a diversified portfolio of companies with strong balance sheets, consistent cash flow generation, and leading products and services leaves little to chance over time. This strategy is positioned to generate a rising income stream as the years roll on.
Johnson & Johnson's example below shows that over the long term, stock prices also tend to rise along with dividends and earnings. This not only benefits income portfolios but offers additional advantages that help investors stay committed to their strategy.
Source: Simply Safe Dividends
The predictable qualities offered by dividend growth stocks become more appealing when investors worry about the future and seek to dial down risk. We haven’t seen as much of that this year as the economy has been more resilient than expected in the face of sticky inflation and higher borrowing costs.
The question now is how long the economy can withstand an extended period of interest rates above 5%, which the Fed intends to keep until the red-hot labor market cools and inflation is confidently tamed.
Daniel Ivascyn, chief investment officer of Pimco, recently stated that historically it takes about five or six quarters for the impact of rising rates to be felt. We might not be out of the woods yet, especially with a couple more rate hikes expected by the Fed this year.
Corporate earnings season kicks off in earnest next week, providing the latest look at the economy’s resilience. While we are eager to analyze how companies across our Dividend Safety Score coverage universe have performed, these data points do not change our long-term investment strategy.
Our three model portfolios remain conservatively positioned in companies that, in aggregate, should continue delivering a rising stream of dividend income whether a recession is in the cards, or the more desirable “soft landing” scenario plays out.
As always, we will do our best to keep you informed on your holdings as they navigate the uncertain outlook. Owning quality dividend stocks can help provide peace of mind and is arguably a more attractive strategy in times like these when many investors don’t appear to be concerned much with risk.
Stay the course and try to ignore the many headline-grabbing events that are unlikely to have a lasting impact on investment returns or company fundamentals.
Thank you for reading, and please feel free to give Simply Safe Dividends a try if you're looking for proven tools and research that can help you oversee your dividend portfolio.
