Charting the Market: What’s Driving the Dividend Factor’s Strong Performance?

By:

Head of SPDR Americas Research

What’s Driving the Dividend Factor’s Strong Performance?

  • The dividend yield factor has produced double-digit positive excess returns over broad traditional beta in 2022
  • A bias toward value and quality supports dividend focused ETFs’ strong excess returns
  • With more than 90% of dividend ETFs outperforming the market in 2022, investors have poured $47 billion into these strategies

Even with July’s rally, broad-based equities remain significantly down on the year. But the dividend yield factor has produced strong positive excess returns over broad traditional beta in both the US and international markets.1

In fact, the factor has produced positive excess returns in six of the past eight months.2 While returns are flat on absolute basis (0.45% in the US), the strong relative returns (+13%) have been a welcomed sight amid deep market losses. As a result, investors have poured $47 billion into dividend focused ETFs this year.3

In this post I will delve into what’s driving dividends’ strong, pervasive returns — and what to expect going forward in this complex market.

What Makes Dividend Yield the Strongest Source of Excess Returns?

Of the 123 funds we classify as dividend strategies, the average return in 2022 is -8.4%. This is 6 percentage points better than the return on the broad S&P Global BMI Index.4 And 96% of funds focused only on US equities have outperformed the S&P 500 Index (-12.4%), with an average return of -5.6%.5 And dividend yield is the strongest source of excess returns among all other factor strategies, outpacing minimum volatility, quality, and size exposures, as shown below.

Year-to-date Excess Returns: Average Factor ETF Return versus S&P 500 Index

Year-to-date Excess Returns: Average Factor ETF Return versus S&P 500 Index

To understand what is driving this strong performance, I grouped the 67 dividend ETFs focusing on just US equities into one portfolio (Portfolio A), equally weighted the ETFs, and rebalanced monthly.

Next, I equal weighted the top 100 stocks in that portfolio (out of 2000) to create a concentrated dividend equity exposure of the most heavily owned stocks within dividend equity ETF exposures (Portfolio B). I also rebalanced Portfolio B monthly. I then ran the performance of both portfolios versus the S&P 500 Index and parsed returns by sectors, market cap, and styles to identify the drivers.

The cumulative return series for both portfolios and the S&P 500 Index is shown below. The more concentrated dividend exposure has had the strongest performance so far this year, as it is only down -2.6%, compared to -5.7% and -13.1% for Portfolio A and the S&P 500 Index on a price return basis, respectively. These returns also came with lesser drawdowns and volatility, as the standard deviation of daily returns for Portfolio A was 18%, Portfolio B 17%, and the S&P 500 Index 24% over this time frame.

Dividend Portfolio Return Time Series versus S&P 500 Index

Dividend Portfolio Return Time Series versus S&P 500 Index

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Footnotes

1 Based on the return of the S&P 500 High Yield Dividend Index versus the S&P 500 Index and the return on the S&P Global Dividend Aristocrats and the S&P Global BMI Index as of August 9, 2022 per Bloomberg Finance L.P. data.
2 Based on the return of the S&P 500 High Yield Dividend Index versus the S&P 500 Index as of August 9, 2022 per Bloomberg Finance L.P. data.
3 Per SPDR Americas Research as of August 9, 2022.
4 Per SPDR Americas Research as of August 9, 2022.
5 Per SPDR Americas Research as of August 9, 2022.
6 Based on the correlation of quarterly excess return of the S&P 500 Pure Value Index and the S&P 500 Index versus the S&P 500 High Dividend Index and the S&P 500 Index from 1994-2022 per Bloomberg Finance L.P. as of August 9, 2022.
7 Based on the quarterly excess return of the S&P 500 Pure Value Index and the S&P 500 Index and the movements in the US 2-year yield from 1994-2022 per Bloomberg Finance L.P. as of August 9, 2022.
8 FactSet as of August 9, 2022.
9 Per SPDR Americas Research as of August 9, 2022.
10 Based on the return of the S&P 500 Pure Value Index and S&P 500 Pure Growth Index from 1994-2022 per Bloomberg Finance L.P. as of August 9, 202213 “The Cash Burning Question”, Barclays Equity Research June7, 2022.
Glossary

Brinson Attribution
Brinson, Hood, and Beebower (1986) presented a breakdown of the arithmetic excess return assuming a simple two- step investment decision process in which the returns are driven by allocation or selection effects.

S&P 500 High Dividend Index
The Index is designed to measure the performance of the top 80 high dividend-yielding companies within the S&P 500 Index.

S&P 500 Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

S&P 500 Pure Growth Index
S&P Pure Growth Indices includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score.

S&P 500 Pure Value Index
S&P Pure Value Indices includes only those components of the parent index that exhibit strong value characteristics, and weights them by growth score.

S&P Global BMI Index
Comprised of the S&P Developed BMI and S&P Emerging BMI, is a comprehensive, rules-based index measuring global stock market performance. The S&P Global BMI represents the only global index suite with a transparent, modular structure that has been fully float adjusted since its inception in 1989.

S&P Global Dividend Aristocrats Index
Designed to measure the performance of the highest dividend yielding companies within the S&P Global Broad Market Index (BMI) that have followed a policy of increasing or stable dividends for at least 10 consecutive years.

Originally Posted August 11, 2022 – Charting the Market

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