By Matt Wagner, CFA
Partner, Research

Do you have dividends?

That’s the pervasive sentiment in stock markets right now.

As the work-from-home business unfolds, one thing is certain: investors are becoming more discerning about investing in companies that pay dividends.

Within the S&P 500, the highest dividend yielding companies have outperformed the lowest yielding companies by 933 basis points (bps) this year. That margin is even larger — 1,017 basis points — compared to the roughly 100 companies in the S&P 500 that don’t pay a dividend.

According to Howard Silverblatt of S&P Dow Jones Indices, S&P 500 dividend payers outperformed non-payers in January with the largest monthly performance gap (6.58%) since July 2004.

As we explained in a recent article, companies with high dividend yields have a shorter duration, so the outperformance of the group given the sharp rise in rates is not a surprise.

S&P 500 Index Dividend Yield Quintiles, YTD

This trend is even more striking when looking at the best and worst performers of the S&P 500. Among the top 10 performers, nine pay dividends (except Discovery).

You could argue that this is largely a sector/inflation story, as this list is made up entirely of energy companies, with the exception of Discovery.

S&P 500 Top 10 Year-to-Date (as of 01/31/22)

The chart below of underperformers is more diverse across sectors. What these companies have in common is that eight of the 10 (excluding Bio-Techne Corp. and Teradyne) not To pay a dividend.

S&P 500 Top 10, year-to-date (as of 01/31/22)

FANAMA revisited

Last fall, we wrote about the outperformance of Facebook, Amazon, Netflix, Alphabet, Microsoft, and Apple over the past few years. We dubbed the group FANAMA (it was before the name change from Facebook to Meta Platforms).

As a group, FANAMA has outperformed the S&P 500 by more than 20% annualized between 2015 and 2020.

Of this group, only Apple and Microsoft pay a dividend. As a result, dividend-focused investments have struggled to keep pace with the wider market given such an unprecedented rally in non-dividend paying stocks.

Naturally, after years of consistent outperformance, investing in FANAMA and similar tech companies had become crowded commerce.

A month into the year, only Apple outperforms the S&P 500. Compared to the equally-weighted S&P 500, a benchmark that mitigates the disproportionate influence of these companies on the performance of the weighted index depending on capitalization, the underperformance is even greater. .

FANAMA shares, year-to-date returns

Among WisdomTree’s large-cap dividend ETFs, the WisdomTree US Quality Dividend Growth Fund (DGRW) and the WisdomTree US LargeCap Dividend Fund (DLN), both have significant weightings to Apple and Microsoft. However, each Fund has an underweight allocation to Apple and Microsoft, over 100 basis points relative to the S&P 500.

The WisdomTree US High Dividend Fund (DHS) does not hold Apple and Microsoft because they each have relatively low dividend yields of less than 1%.

FANAMA weight

For the holdings of the Sub-Funds mentioned in the table above, please click on the respective symbol: DGRW, DLN, DHS.

The start of 2022 has been a favorable backdrop for WisdomTree’s family of US dividend ETFs.

Some highlights in January:

Standardized performance and performance data for the most recent month-end are available by clicking here.

For definitions of terms in the table above, please see the Glossary.

Conclusion

As we wrote recently, we believe investors should continue to favor dividend-paying stocks in this environment of high inflation and negative real yields on fixed income securities.

Value in general, and the dividend-yield factor in particular, have been tested for most of the past 15 years against growth. We believe that the rotation that has occurred over the past few months is just the beginning of a longer-term mean reversion in favor of value/dividends.

Important risks related to this article

There are risks associated with investing, including possible loss of capital. Funds focusing their investments on certain sectors and/or on smaller companies increase their vulnerability to any particular economic or regulatory development. This can lead to greater stock price volatility. Dividends are not guaranteed and a company currently paying dividends may stop paying dividends at any time. Please read each Fund’s prospectus for specific details regarding that Fund’s risk profile.

References to specific securities and their issuers are provided for illustrative purposes only and are not intended to be, and should not be construed as, recommendations to buy or sell such securities.

Originally published by WisdomTree on February 3, 2022.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.