Written by: Jacob Johnson | Advisor Asset Management
As many as 59 companies in the S&P 500 cut or eliminated their dividend in 2020 – yet the index still managed to grow dividends payments 0.44% from a year earlier and set a record payout to investors. It makes us wonder what the payout would have been without a global pandemic and it’s remarkable considering the last time we saw a significant spike in dividend cuts was in the aftermath of the 2008-09 financial crisis when 74 companies in the S&P 500 reduced their dividend. That year payments dropped 17%.
|
S&P 500 Index |
2020 |
2009 |
|
Peak Dividend Cuts/Suspensions (T12) |
59 |
74 |
|
Dividend Per Share Growth (Year over Year) |
0.44% |
-17.11% |
Source: AAM, Bloomberg data
The resiliency of dividend payments in 2020 highlights an evolving dividend landscape that has implications for investors going forward. For example, if an investor is hunting for yield the Energy Sector now pays over 100 basis points more than Utilities, while traditional “yield” sectors like Communication Services (Telecom) now pays less than 1%. The table below shows the dividend yield of the S&P 500 broken down by sector over time.
Dividend Yield
|
Sector |
3/19/2021 |
12/31/2015 |
12/31/2010 |
12/31/2005 |
|
S&P 500 |
1.43% |
2.09% |
1.77% |
1.73% |
|
Communication Services |
0.87% |
1.63% |
2.84% |
2.20% |
|
Consumer Discretionary |
0.59% |
1.33% |
1.05% |
0.80% |
|
Consumer Staples |
2.56% |
2.79% |
2.83% |
2.04% |
|
Energy |
4.41% |
3.93% |
2.03% |
1.72% |
|
Financials |
1.86% |
1.79% |
0.85% |
2.27% |
|
Health Care |
1.57% |
1.63% |
2.23% |
1.56% |
|
Industrials |
1.43% |
2.24% |
1.84% |
1.76% |
|
Information Technology |
0.93% |
1.82% |
0.98% |
0.69% |
|
Materials |
1.68% |
2.40% |
1.44% |
2.08% |
|
Real Estate |
2.76% |
2.99% |
2.27% |
2.88% |
|
Utilities |
3.33% |
3.79% |
4.29% |
3.40% |
Source: AAM, FactSet data | Past performance is not indicative of future results.
Perhaps an investor is more concerned with sustainable/resilient dividend payments. The Information Technology sector is now firmly the largest contributor to S&P 500 dividend payments at 16.89% (and growing) followed by Financials (14.46%) and Healthcare (13.87%). This is a big reason why dividends per share were still able to grow in 2020 despite the obvious challenges.
Dividend Contribution
|
Sector |
3/19/2021 |
12/31/2015 |
12/31/2010 |
12/31/2005 |
|
Communication Services |
6.86% |
7.52% |
9.58% |
6.07% |
|
Consumer Discretionary |
5.40% |
6.58% |
5.00% |
3.31% |
|
Consumer Staples |
11.82% |
13.65% |
17.44% |
13.21% |
|
Energy |
8.52% |
11.10% |
12.19% |
9.30% |
|
Financials |
14.46% |
11.86% |
7.33% |
25.26% |
|
Health Care |
13.87% |
11.73% |
14.21% |
12.15% |
|
Industrials |
8.68% |
10.75% |
11.41% |
12.61% |
|
Information Technology |
16.89% |
14.59% |
9.80% |
6.06% |
|
Materials |
3.12% |
2.66% |
2.65% |
2.65% |
|
Real Estate |
4.55% |
4.32% |
3.01% |
2.85% |
|
Utilities |
5.83% |
5.24% |
7.38% |
6.52% |
Source: AAM, FactSet data | Past performance is not indicative of future results.
We’ll add the disclaimer that some of the sector movements are due to the impact of GICS (Global Industry Classification Standard) classification changes. For example, Financials and Real Estate were separated in September 2016 and Telecommunication Services was reclassified as Communication Services in September 2018, which included significant changes in membership. In our opinion, the larger force has been changing market dynamics. The growth/maturation of certain industries like Semiconductors and the decline (for now) of others such as Oil and Gas have turned Information Technology into a dividend machine and Energy into a high-yield play. While these changes have happened slowly, over time they can be significant and start to show up in other areas.
Some of these changes could be, in part, impacting the risk/return profile of the dividend space as well as the sensitivity analysis. Here are a couple examples. Dividend Payers, as measured by the Dow Jones Select Dividend Index, underperformed the broad market during the February/March bear market last year, as well as during the subsequent rebound. Typically, we expect dividend payers to provide one of two things: downside protection during a selloff -or- they will be one of the first spots investors will dip their toe into the equity market when volatility spikes. We saw neither of those.
| Selloff | Rebound | |
| 2/19/20 - 3/23/20 | 3/23/20 - 3/19/21 | |
| S&P 500 Index | -33.79% | 17.78% |
| DJ Select Dividend Index | -40.64% | 12.97% |
Source: AAM, Bloomberg data
More recently we have seen another outlier. High dividend-paying equities or “bond proxies” have significantly outperformed the broad market as interest rates have moved higher. Typically bond proxies are “long duration” stocks, meaning they are relatively more sensitive to changes in interest rates and tend to underperform when yields move higher. Our research shows in the last 30 years there have been seven periods where the yield on the 10-Year Treasury has increased over 1.5%. The average annual return of the S&P 500 Index has doubled that of the S&P High Dividend Index during those periods, registering 16.4% and 8.3% respectively. This time around, the yield on the 10-Year Treasury has increased approximately 1.215% from the all-time low in August (8/04/20 – 3/19/21.) The S&P High Dividend Index has outperformed the S&P 500 Index by 23.52% over that period.
| Change in 10-Year Treasury Yield |
S&P 500 Index Total Return |
S&P 500 Dividend Index Total Return |
|
| 8/4/20 - 3/19/21 | 1.215% | 19.59% | 43.11% |
Source: AAM, Bloomberg data | Past performance is not indicative of future results.
Add it all up and striking the right balance between factors such as dividend-yield/dividend-sustainability or high-income/income-growth is an ongoing challenge and it might be different than what it was just a few short years ago. The atypical performance cycles we have seen over the last year or so are a good reminder to dig deep into underlying holdings of dividend portfolios to understand exactly what the exposures are because the landscape has and will continue to evolve.
Related: Is the 2021 Economic Recovery Overhyped?
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