Dull, boring, repetitive … the investment case for high-quality dividend growers

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

– George Soros

Regardless of the causes of recessions and their nuances, historically, high-quality dividend payers and growers perform well prior to, during, and after a recession. Where it’s impossible to “time the recession,” an asset allocation that consists of a sleeve of high-quality dividend growers is important for potential risk-adjusted returns.

There has been an increase in chatter of a recession after the surprising announcement that the U.S. economy contracted by 1.4%, on a seasonally adjusted and annualized basis, for the first quarter of 2022. While we were surprised at the negative announcement, we maintain our stance that a typical recession in 2022 remains a low-probability event.

With the increased chatter of a recession (not our base case), we’ve received requests for sector performance during previous recessions. The data doesn’t go further than 1990 for the S&P 500 GICS (Global Industry Classification Standard) sectors, as the data originated on September 11, 1989—as per the S&P Global website. As a result of the limitation in the data, we looked at the previous three recessions: 1990–91, dot.com, and the Global Financial Crisis—we didn’t look at the “COVID recession” since it was self-induced. We looked at sector performance one year before the recession, where available, during the recession, and one year after the recession. It should be noted that when comparing environments, there are nuances—we’ve defined these nuances in the “Appendix of this article.

Not surprisingly, as the tables illustrate, there’s no consistency among sectors through the different recession periods. As indicated above, each period has individual nuances. We included the S&P 500 Dividend Aristocrats Index¹ as a proxy for quality businesses and the findings were very interesting. In the table below, we show where the S&P 500 Dividend Aristocrats Index ranked alongside the existing ten GICS sectors in each period during the various recessions. The lower the number, the higher the ranking. For example, the S&P 500 Dividend Aristocrat Index ranked number 1 against the 10 GICS sectors during the dot-com recession. Regardless of the recession and each one’s individual characteristics, high-quality dividend payers and growers performed well prior to, during, and after the recession.

Performance ranking of S&P 500 Dividend Aristocrats Index vs S&P 500 Global Industry Classification Standard (GICS) sectors

Sector performance one year before, during, and one year after the 1990 recession (July 1990 – March 1991), dot-com recession (March 2001 – November 2001), and Global Financial Crisis recession (December 2007 – June 2009)

  1990 Dot-com recession

Global Financial Crisis

1 year before recession

4* 4 9

During recession

3 1 2

1 year after recession

3 1 3

* Due to data availability, performance data shown for this period begins on the benchmark’s respective inception date.  S&P 500 GICS inception date is September 11, 1989; S&P 500 Dividend Aristocrats Index inception date is January 1, 1990.

Source: Bloomberg, Capital Market Strategy, Manulife Investment Management as of April 30, 2022. Table shows ranking out of 11: 10 S&P 500 GICS sectors and the S&P 500 Dividend Aristocrats Index. Indices are unmanaged and can’t be purchased directly by investors. Past performance isn’t indicative of future results. 

What are high-quality dividends?

  • Dividends that are supported by companies whose earnings have remained resilient through different economic cycles (high percentage chance of recurring revenue
  • Dividends that are supported by a business that can invest in organic growth while expanding margins
  • Dividends that are supported by a business that have pricing power and opportunities to grow market share
  • Dividends paid by companies that have had high and consistent return on equity
  • Past performance doesn’t guarantee future results, and you shouldn’t rely on it as the basis for making an investment decision.

Over the next couple of months, we believe inflation will likely peak and trend lower from the current level of 8.6% as measured by the Consumer Price Index. It’s unlikely to fall to levels that were present prior to the pandemic as a result of higher wages, as well as energy and food costs. Inflation will remain a concern throughout 2022 but will likely receive nowhere near the level of attention it’s receiving today.

As the chart below illustrates, high-quality dividend growers have historically outperformed their broad, large-capitalization U.S. peers in most inflationary environments. With inflation likely to remain higher than 3% throughout the next year, high-quality dividend growers are potentially positioned to do well.

One-year forward return during periods of inflation
Since 1990
This chart shows the one-year forward returns of the S&P Aristocrats 500 Dividend Index and the S&P 500 Index during periods of inflation, in periods of less than one year to greater than four years.

Source: Bloomberg, Manulife Investment Management, Capital Market Strategy, as of April 30, 2022. Indices are unmanaged and can’t be purchased directly by investors. Past performance isn’t indicative of future results.

The X axis refers to the levels of inflation (%). The Y axis is performance in USD. The S&P 500 Index is a market capitalization weighted index of 500 leading publicly traded companies in the U.S. It’s widely regarded as the best single gauge of large cap U.S. equities.

There has been no shortage of risks in 2022

This isn’t the most severe global economic backdrop but it’s one of the most complicated. The complicated backdrop includes levels of global inflation not seen in decades, supply chain disruptions, conflict in Europe, and COVID-19-related shutdowns in China. Despite the uncertainties, we’ve witnessed the benefits of quality dividend growers in year-to-date performance. The S&P 500 Dividend Aristocrats Index has underperformed only in the energy, utilities, and industrial sectors. Moving forward, high-quality dividend growers are likely to have less volatility than the energy sector and more potential growth than the utility and infrastructure sectors, which are typically very defensive sectors with little room for growth.

S&P 500 GICS Sector performance (USD) vs. S&P 500 Dividend Aristocrats Index (USD), S&P 500 Index (USD), Nasdaq Index (USD) and S&P/TSX Index (CAD)
2022 Year-to-Date
Here’s a chart that compares S&P 500 Index sector performance to the S&P Aristocrats 500 Dividend Index performance in 2022, so far.

Source: Bloomberg, Manulife Investment Management, Capital Market Strategy, as of May 31, 2022. Indices are unmanaged and can’t be purchased directly by investors. Past performance isn’t indicative of future results. Orange indicates indices while blue indicates sectors

Regardless of the recession and their nuances, high-quality dividend payers and growers have historically performed well prior to, during, and after the recession. While it’s impossible to “time the recession,” an asset allocation that consists of a sleeve of high-quality dividend growers is important for potential risk-adjusted returns.

Appendix

It should be noted that when comparing environments, there are nuances, including:

  • Distribution of sector returns is so wide that the average doesn’t necessarily instill confidence.
  • Types of companies within sectors have changed over time (e.g., information technology).
  • Sectors are very heterogeneous. Companies within sectors are so different (e.g., Best Buy and Hillenbrand).
  • Each period has individual nuances. What were the inflation numbers, interest rates, causes of recession, etc.?
  • There are new sectors today that didn’t exist before (e.g., real estate), changes to sector names (e. g., telecommunication services to communication services), and changes of companies assigned to the different sectors.
  • There’s a survivorship bias (some companies no longer exist).

Sector performance one year before, during, and one year after the 1990 recession (July 1990 – March 1991), dot-com recession (March 2001 – November 2001), and Global Financial Crisis recession (December 2007 – June 2009)

1990

 

1 year before recession

During recession 1 year after recession

Financials

-17% 7% 15%

Energy

18% -3% -13%

Materials

-6% -3% 17%

Industrials

4% -1% 10%

Telecom

-3% -1% -3%

Consumer discretionary

-10% 5% 20%

Consumer staples

18% 20% 13%

Utilities

-1% 4% 3%

Health care

25% 18% 10%

Information technology

-3% 5% -2%
S&P 500 Dividend Aristocrats 7% 14%

16%

Due to data availability, performance data shown for this period begins on the benchmark's respective inception date. S&P 500 GICS inception date is September 11, 1989; S&P 500 Dividend Aristocrats Index inception date is January 1, 1990.

Dot-com

 

1 year before recession

During recession 1 year after recession

Financials

9% -3% 10%

Energy

4% -11% -9%

Materials

-12% 10% -6%

Industrials

-5% 0% -21%

Telecom

-39% -14% -29%

Consumer discretionary

-18% 0% -15%

Consumer staples

25% 2% -6%

Utilities

32% -29% -34%

Health care

15% 6% -20%

Information technology

-61% 2% -28%
S&P 500 Dividend Aristocrats 15% 11%

-5%

Global Financial Crisis

 

1 year before recession

During recession 1 year after recession

Financials

-21% -59% 15%

Energy

32% -38% 0%

Materials

20% -41% 12%

Industrials

10% -46% 25%

Telecom

8% -38% -2%

Consumer discretionary

-14% -30% 26%

Consumer staples

12% -20% 10%

Utilities

16% -34% 1%

Health care

5% -25% 7%

Information technology

16% -30% 15%
S&P 500 Dividend Aristocrats -2% -22%

23%

Source: Bloomberg, Manulife Investment Management, Capital Market Strategy, as of April 30, 2022. Indices are unmanaged and can’t be purchased directly by investors. Past performance isn’t indicative of future results.

The Index measures the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. 2 Past performance doesn’t guarantee future results, and you shouldn’t rely on it as the basis for making an investment decision.

A rise in interest rates typically causes bond prices to fall. The longer the average maturity of the bonds held by a fund, the more sensitive a fund is likely to be to interest-rate changes. The yield earned by a fund will vary with changes in interest rates.

Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments.

The opinions expressed are those of Manulife Investment Management, as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Manulife Investment Management disclaims any responsibility to update such information. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers, or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management Limited, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment, or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Investment Management.

Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

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Macan Nia, CFA

Macan Nia, CFA, 

Co-Chief Investment Strategist

Manulife Investment Management

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Kevin Headland, CIM

Kevin Headland, CIM, 

Co-Chief Investment Strategist

Manulife Investment Management

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