11 months ago • 2 mins
Dividends might not be the hottest income source right now, but they can still deliver some much-needed warmth to your portfolio. The S&P 500 High Dividend Index proved its worth last year, dipping only 1.1%, compared to the S&P 500’s sharp 18.1% fall. And over the past four decades, the top 20% of high-dividend-yielding stocks outperformed stocks that didn’t pay dividends by at least 2%.
But the performance of high-dividend-yielding stocks isn’t exactly uniform in nature. It tends to vary across business cycles, and how well you do depends on when you own such stocks, and which dividend index you track. As the chart shows, different high-dividend indexes have varying sector and style tilts – and you should be aware of those. Most of these indexes naturally tilt toward sectors where growth is slow but cash flow is steady, like utilities, energy, healthcare, and consumer staples. But some indexes even exclude companies that don’t pay a dividend, like high-growth tech companies. The greater these sector biases – that is, the more they deviate from the composition of the market index – the higher the risk that they’ll have heavier drawdowns than the market.
So before you consider buying exposure to a high-dividend index, remember they’re not all created the same. Choose your strategy wisely by determining how closely you’d like your index to track the market: the closer the beta to one (chart, at left), the closer the performance will likely be to the market. Make sure you understand the sector composition of the index you choose as well. For example, ETFs that track the MSCI USA High Dividend Yield Gross Return will have a lower exposure to financial companies compared to other high-dividend index ETFs. Lastly, with interest rates as high as they are now, you’ll be wise to diversify your overall income sources, by investing in other asset classes like government bonds, or cash deposits.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.