adminDividend-paying stocks are coming off a bad year, which is why you may want to buy them.
That’s not a typical reaction, either from advisers or investors, especially when a group of stocks has underperformed the broad market by double-digit amount s— as many dividend-stock funds and ETFs have done over the last 12 months. But history suggests that these strategies could very well bounce back in a big way in coming months.
That’s because dividend stocks’ performance relative to the broad market — their alpha — tends to swing between positive and negative extremes at fairly regular intervals. In the past when dividend stocks’ trailing 12-month alpha was as negative as it is currently, their subsequent 12-month alpha was more often than not positive.
This oscillation is evident in the chart above. It was constructed by taking the trailing 12-month total return of the 10% of stocks with the highest dividend yields and subtracting the comparable return of the S&P 500
SPX.
(The data are courtesy of Dartmouth College’s Ken French.) The latest alpha (through the end of October) is lower than negative 15 percentage points. Since 1940, it’s been lower than today’s level just 7% of the time. The chart certainly suggests that dividend stocks’ alpha over the next 12 months may be positive — and perhaps strongly so.
The most recent two 12-month periods live up to this longer-term pattern. The table below lists the 10 dividend-focused ETFs with the greatest assets under management, per an ETF database maintained by VettaFi. While they have significantly underperformed the S&P 500 over the past 12 months, over the 12-month period before that they beat the S&P 500 by almost as much (or more) than they did recently.
| ETF | Alpha over last year(11/2/2022 to 11/2/2023) | Alpha year before last(11/2/2021 to 11/2/2022) |
| Vanguard Dividend Appreciation ETF (VIG) | -6.8% | +7.2% |
| Schwab US Dividend Equity ETF (SCHD) | -17.4% | +13.8% |
| Vanguard High Dividend Yield Index ETF (VYM) | -15.7% | +16.7% |
| iShares Core Dividend Growth ETF (DGRO) | -11.4% | +9.5% |
| SPDR S&P Dividend ETF (SDY) | -19.2% | +16.5% |
| iShares Select Dividend ETF (DVY) | -20.8% | +18.7% |
| Schwab Fundamental US Large Co. Index ETF (FNDX) | -7.5% | +10.7% |
| ProShares S&P 500 Dividend Aristocrats ETF (NOBL) | -13.2% | +10.2% |
There are no guarantees that the bounceback will occur this time around. But at a minimum the historical record suggests that dividend-stock investors should not throw in the towel just because of the past 12 months’ disappointing performance. And the gutsy among you might want to go further and buy more dividend stocks at today’s depressed prices.
Which dividend stocks?
Not all high-yielding stocks are good investments, however. Sometimes a high yield indicates that the underlying company is in financial trouble and is at risk of cutting its dividend. So it’s prudent to focus on dividend yield in the context of other metrics as well.
The dividend ETFs in the table above each claim to do that. Another approach is illustrated in the table below, which lists the highest-yielding stocks among those currently recommended by at least three of the investment newsletters my performance auditing firm monitors.
| Stock | Yield |
| LEGGETT & PLATT INC (LEG) | +7.7% |
| 3M CO (MMM) | +6.5% |
| FIFTH THIRD BANCORP (FITB) | +5.6% |
| INTERNATIONAL PAPER CO (IP) | +5.4% |
| PFIZER INC (PFE) | +5.4% |
| M D C HLDGS INC (MDC) | +5.4% |
| PNC FINL SVCS GROUP INC (PNC) | +5.2% |
| MORGAN STANLEY (MS) | +4.6% |
| TYSON FOODS INC (TSN) | +4.0% |
| OLD NATL BANCORP IND (ONB) | +4.0% |
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
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