Are Dividends Hot or Not?
Igor Manukhov - Feb 09, 2024
Don't take any historical trends for granted. Always check for relative strength.
Last week I was reviewing relative strength charts that compared different styles. Relationship between dividend stocks vs overall markets caught my eye.
All things being equal, I do like dividends, but I never focus solely on the yield. Instead, I focus on total return potential that will be some combination of growth and income.
In this higher rate environment and with such a poor performance of bank stocks over the last few years, more and more people have been asking me about high dividend paying stocks.
Below is the relative strength line (black line) that compares S&P high dividend US stocks with the overall S&P500 index. Dividend index yields twice as much as S&P. When this black line is rising, dividend index is outperforming. Falling black line means that S&P total return was higher that total return of this dividend index. As a reminder, total return equals capital gain plus a dividend yield. So a stock could have a high dividend and have a poor total return at the same time. That would simply mean that stock had a poor price growth that chew away at a higher yield.
As you can see, dividend paying stocks have underperformed overall market by over 25% since 2014. That is why, while I do respect dividends and most of my holdings happen to pay some dividends, I am not chasing high dividend paying stocks simply because they have attractive yields.
As always, I monitor this relationship regularly and when high dividends will start to outperform, I will adjust portfolios accordingly. Until that happens, I will stick with what works at the moment.
