Dividend-Paying Stocks Offset High Volatility

Blue-chip dividend strategies outperformed everything last year, posting only low single-digit declines. Based on history, dividend stocks can thrive during market uncertainty. 2022 was a great case and point.

Today I’ll show you why dividend-paying stocks offset high volatility environments, like now.

Let’s rewind a bit. Last February I told you 2022 was shaping up to be the year of the dividend. And it was from MAPsignals’ viewpoint. Our weekly reports highlighted many big winning dividend stocks like Merck (MRK) last year.

We didn’t know how right we’d be!

 Anyone whose read my 2023 Outlook knows I think stocks are going to rebound this year. But I also said it’s going to be a bumpy ride. That’s where dividends come in.

With macro uncertainty off the charts, I’ll show you why dividend strategies are hotter than ever and why they’ll keep working. Then, I’ll lay out the best sectors to overweight and I’ll use MAPsignals’ ETF scoring feature (coming soon to subscribers) to find a dividend ETF that checks all the boxes.

Albert Einstein once described compound interest as the “eighth wonder of the world.” He was 100% right. Since 1930, the S&P 500 has returned only 5.7% per year without dividends vs. a 9.7% average annualized return when reinvested dividends are included. Dividends account for over 40% of the market’s long-term returns.

Below you can see how much reinvesting dividends has helped returns over time, especially in weaker markets in the 1930s, 1940s, 1970s and the 2000s. Dividends offer relief in market downdrafts:

History shows why dividends make a huge difference. But let’s keep going and talk about why they’re especially important now.

Dividend-paying Stocks Offset High Volatility

Hedging Volatility: Investors are sick of gut-wrenching volatility and weak returns. Dividends can help. Check out this next chart. Since 1990, companies with the financial strength to grow their dividends outperformed during volatile markets.

The VIX (a popular gauge measuring volatility on the S&P 500) has averaged 25 over the last 3 years.  In months when the VIX Index increased, dividend growers beat non-dividend payers by an average of 1.06%.

Even better, the more volatility rose, the more they outperformed. In months when the VIX rose over 20%, dividend payers outperformed by 2.06%. Notably, dividend-paying stocks offset high volatility. The higher the uncertainty, the strong the outperformance:

Beating Inflation: High inflation has investors scrambling for income. Leading blue-chip dividend strategies sport healthy 3.5%-4% yields. Even better, they have a phenomenal track record of outperforming most when inflation is high.

Currently, CPI is 7.1%. Since 1970, when inflation runs hotter than 6%, dividend outperformance is massive. See below:

Better Risk-Adjusted Performance: Given dividend stocks’ ability to weather high volatility and inflation so well, this next chart is no surprise.

Since 1950, S&P 500 dividend payers have outperformed both the broader market and non-dividend payers with less risk than either. Higher risk-adjusted returns are the holy grail of investing. That’s what dividend investing can do for you.

Since 1973, dividend payers had an annualized return of 9.2% vs only 4% for non-dividend payers:

Financial Strength: Years of strong economic growth and low borrowing costs have left companies flush with cash. In 2022, S&P 500 constituents paid a record $590B in dividends, up 201% from $196B in 2009.

Despite record payouts, the S&P’s payout ratio – the percentage of profits its constituents use to cover dividends – is only 39%, well below the 52% long-run average. That leaves lots of room for future dividend growth.

How to Play It

With the S&P 500 only yielding 1.7%, buying an index fund isn’t the answer. Instead, target high-quality, “best of breed” companies with strong cash flows and yields in the 3%-4% range that consistently grow their dividends 5%-10% a year, doubling their payouts every decade.

There are several well-established, dividend-focused ETFs out there. Picking the right one can be tough. I screened the leading dividend ETFs across key fundamental and technical metrics using the MAPsignals ranking process.

Below are the top 3 funds.

As you can see, VYM edges out the others with a higher MAP score compared to the others. Below are the bullets that jump out at me for this fund.

The Vanguard High Dividend ETF (VYM) checks all the boxes:

• 5% annual returns since 2006 inception with 10% less volatility than the S&P 500
• Healthy 3.9% dividend yield with a hefty 8% annual dividend growth since inception
• 45% dividend payout ratio signals ample room for dividend growth
• Lowest expense ratio in the category – a rock-bottom 0.06%
• Big & liquid – $52B is assets with 2M shares of average daily trading volume

And while this is all dandy, the fund has a 61% weighting in strong scoring MAPsignals sectors: Energy, industrials, staples, utilities, materials & health care ranked tops all last year.

VYM also sports a 20% financials weighting. As I mentioned in my 2023 Outlook, this is my favorite sector for 2023. It’s off to a strong start. It’s #2 in performance YTD.

Take a look:

Bringing It All Together

2023 is shaping up to be another strong year for income investing. Dividends are popular because they outperform most when market volatility and inflation are high. Plus, healthy corporate balance sheets and low payout ratios mean continued dividend hikes loom.

The dividend “sweet spot” is stocks with 3%-4% yields and strong track records of dividend growth. VYM offers a convenient, low-cost way to get both. And our ranking process agrees!

Just sit back and let compounding do the rest. And remember, dividends are the best cure for inflation and volatility.

MAPsignals subscribers can access our portal to scan for stocks under accumulation in this challenging market. Many of the leaders are dividend payers. Get started with a subscription here.

Check out our latest top dividend aristocrats video for 2023.

Invest well,

-Alec