Amid a challenging market in 2022, investors seeking an inflation hedge and stability may find opportunities in dividend strategies. As growth-focused and technology stocks, which are sensitive to the rise in interest rates, continue to suffer, we see dividend stocks as an alternative to achieve outperformance over the broader market, benefiting from the current macro regime of high inflation and slowing growth.
Dividend stocks have outperformed the broader stock market year-to-date while financial conditions have tightened. The S&P/TSX Composite High Dividend Index has outperformed the S&P/TSX Composite Index by 8%, and the S&P 500 High Dividend Index has outperformed the S&P 500 Index by 13% (Figure 1).1
Figure 1: Dividend stocks outperformed the broader market as rates have risen
Source: iShares Investment Strategy, Bloomberg, S&P 500 High Dividend Index and S&P 500 Index performance data rebased to 100 from January 1, 2021 to October 26, 2022.
Income as a driver of returns
Equity investments offer two sources of potential return: dividend income and price appreciation. Over the past 30 years, dividends have accounted for 45% of the total return from the Canadian equity market2 and 53% of the total return from the U.S. equity market3. This shows how dividend income can be a powerful driver of portfolio returns, which has been particularly true this year as equities in many regions are experiencing price declines.
Income for protection against inflation
Dividend stocks distribute regular income, which can help investors meet their current spending needs. Fixed bond payments are also regular but tend to be more exposed to inflation than equities. This is because stocks may grow their dividends and realize capital appreciation (Figure 2), potentially making them better positioned to keep pace with, or exceed, inflation over the long term.
Figure 2: Canadian equity market return and Inflation
Source: Bloomberg, data as of May 31, 2022.
Income for portfolio resilience
Dividend-paying stocks have tended to weather equity market volatility better than non-payers. The ability to consistently pay dividends suggests that a company is mature, has cash flow and cash on hand. Strong cash flows are a sign of a company that is relatively stable. While never guaranteed, corporate boards tend to set dividends at levels that can be maintained. Thus, dividend stocks typically pay a cash return regardless of share price movement, and this income component may help reduce losses in a down market. Figure 3 illustrates this point, highlighting that historically, dividend payers have outperformed non-dividend payers during bear markets.
Figure 3: Historical average returns by dividend categories
12/31/1978 - 12/31/2021
Source: Refinitiv, with data from Compustat and IDC. Data from 12/31/1978 through 12/31/2021. The investment universe is the 500 largest U.S. stocks by market cap. Dividend policy constituents are calculated on a rolling 12-month basis and are rebalanced monthly. Category returns are calculated on a monthly basis. Shown for illustrative purposes only. Past performance is not indicative of future returns. The Dividend Growers & Initiators category represents historical performance for companies which either increased or initiated their dividend distribution. The Dividend Cutters & Eliminators category represents historical performance for companies which either cut or eliminated their dividend distribution. The Equal Weighted category represents historical performance for the 500 largest U.S. stocks by market cap, calculated by assigning the same weighting (0.20%) to each constituent. The non-dividend payers category represents historical performance for companies which historically have not paid a dividend.
Taking action
In the uncertain market environment of 2022, dividend stocks may provide resilience in the face of tightening financial conditions, potentially offering investors income, inflation protection, and stability in a portfolio. ETFs are efficient vehicles to gain exposure to a diversified basket of dividend stocks. Below we highlight two suites of dividend ETFs from RBC iShares: RBC Quant Dividend Leaders ETFs and iShares Quality Dividend Index ETFs, both targeting to provide high, sustainable dividend yield through high quality companies. See Figure 4 for more details.
Figure 4: RBC iShares dividend ETF suites highlight
Quant Dividend Leaders ETFs | Quality Dividend ETFs | |
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Characteristics |
|
|
Methodology | Active quantitative strategies, managed by RBC GAM Quantitative Investments Team | Index-tracking strategies that follow MSCI High Dividend Yield Indexes |
Weighting | Market-cap weighting | Modified market-cap weighting |
Factors considered | Profitability, quality, value, growth, technical (momentum), dividend | Dividend growth, dividend sustainability, quality |
Geographic coverage | Canada, U.S., EAFE, EM, Europe | Canada, U.S. Global |
Related funds
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iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV) -
iShares Core MSCI US Quality Dividend Index ETF (XDU) -
iShares Core MSCI Global Quality Dividend Index ETF (XDG) -
RBC Quant Canadian Dividend Leaders ETF (RCD) -
RBC Quant U.S. Dividend Leaders ETF (RUD) -
RBC Quant EAFE Dividend Leaders ETF (RID) -
RBC Quant Emerging Markets Dividend Leaders ETF (RXD) -
RBC Quant European Dividend Leaders ETF (RPD)