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Written by: Brentview Investment Management
2024 surprised many equity investors to the upside, although performance varied widely depending on the investment. For example, the frequently discussed “Magnificent Seven” return dwarfed the broader market in 2024, returning an average 65.6% for the seven mega-cap technology companies. Ultimately, this cohort was responsible for 53% of the S&P 500 Index’s total return in 2024, which leaves the remaining index constituents generating the remaining 47% of the index’s annual return.
Not all dividend-payers are the same
Dividend-paying equities also experienced high performance dispersion in 2024. In fact, when it comes to dividends, many investors frequently seek as much yield as possible, which may not be the best route to generating total return.
As a category, returns for dividend-payers were ultimately driven by fundamentals of the underlying company and evidenced by its dividend yield. In other words, as stock prices rose, corresponding dividend yields fell. Generally, as a cohort, lower yielders are more tilted toward growth while high yielders tilt toward value. From a portfolio perspective, incorporating dividend-payers across a wide range of yields could help capture both cyclical and defensive opportunities, which can collectively lead to a more balanced approach.
The table below illustrates the performance dispersion of the U.S. Mid-Large Cap Universe. It is notable that the less-than-1% category significantly contributed more to total returns than all other dividend-paying categories combined. Furthermore, the non-payers category contributed over 670bps to the overall return. Conversely, the higher yielding 2-3% and 3%-plus categories both saw average returns in the 14% range, well behind the broader group. As a category, the entire dividend-payer cohort returned 18.2%, which lagged the broader equity universe.
Table 1
Source: FactSet Research. Past performance does not guarantee future results.
Now consider the NASDAQ U.S. Broad Dividend Achievers Index (Broad Achievers), shown in Table 2, which is comprised of U.S.-accepted securities with at least 10 consecutive years of increasing annual regular dividend payments.1 The higher yielding NASDAQ U.S. Dividend Achievers 50 Index (Achievers 50) is comprised of the top 50 securities by dividend yield from the aforementioned Broad Achievers Index.2
As shown in Table 2, the yield-focused Achievers 50 returned 5.8% in 2024, dramatically missing the mark when compared to the 18.2% average return found in the U.S.-listed Mid-Large Cap dividend-paying cohort, previously shown in Table 1. Ultimately, the underperformance demonstrates the drawbacks of limiting your universe to companies with 10+ years of dividend-paying history and focusing on the highest dividend yielders.
Table 2
Source: Nasdaq. Past performance does not guarantee future results.
When rules bite back
Rules-based index funds, “smart beta” strategies, and quantitative-oriented portfolios have taken root and found their way into many portfolios, but are they a reliable source of consistent performance? The upside of these rules-based approaches is that they are easy for investors to understand and managers to follow, can be run cheaply via automation, and screening rules quickly reduce the potential candidate list to a manageable list of companies. The downside of this approach is that by following these rules the investor might be trading potentially higher performance for simplicity. The lost opportunity cost could be much greater than the lower operating cost.
More specifically, Broad Achievers takes into consideration companies with a minimum market cap of $150 million, ensuring the index truly has representation across the spectrum of market capitalizations. Similarly, as seen below in Table 3, Broad Achievers takes full advantage of the dividend-paying opportunity set. Conversely, Achievers 50 has a rule to include the 50 highest dividend yielders found within the Broad Achievers Index. The surprising takeaway is that the entire allocation within the Achievers 50 Index resides solely within the 3%-plus category. The result of this “yield first” approach is that the Achievers 50 Index trailed the Broad Achievers Index by almost 1,200bps in an otherwise favorable equity market in 2024, as shown below in Table 4.
Table 3
Source: FactSet data, Brentview analysis. Past performance does not guarantee future results. It is not possible to invest directly in an index.
Table 4
Historical Performance by Index
Source: Nasdaq. Past performance does not guarantee future results. It is not possible to invest directly in an index.
Summary
While investing philosophies can take several forms, diligence is required when selecting portfolio holdings. We believe that rules can be helpful in whittling down a list of potential candidates, however, when allocating to dividends payers, it’s important to remember that not all dividend payers behave in the same way. Allocating across the entire spectrum of the dividend-yield opportunity set may help diversify several risks, interest rate and economic cyclicality being the two broadest. Additional diversification by sector and industry can also be achieved, when yield isn’t the driving factor.
Outlook
As we head into 2025, we anticipate that opportunities will continue to be found across the entire dividend-paying landscape. One thing is clear: investors have focused more on topline growth and have looked beyond absolute dividend-yield levels alone over the last few years, and especially since the Federal Reserve has changed their interest rate policy posture. The pace of the Federal Reserve’s future policy moves could put interest rate-sensitive equities under pressure. Additionally, as the Trump Administration takes hold, some financial elements of the Inflation Reduction Act (IRA) may come under further scrutiny and may ultimately be cut. While we believe the IRA cuts will be balanced, due to it being a bipartisan enacted law, the effects could still be meaningful enough to warrant paying attention.
1 https://indexes.nasdaqomx.com/Index/Overview/DAA
2 https://indexes.nasdaqomx.com/Index/Overview/DAY
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