The Great Dividend Divide

By Dr. Leila Heckman, January 12, 2021

It is important to know that the highest dividend yielding stocks are not necessarily the best source either for consistent dividend income or equity returns. But amongst dividend paying stocks there is a great divide. There are other segments of dividend paying stocks which tend to have attractive yields and which also keep up with the returns of the S&P 500. Our research indicates this is particularly true today with yields on fixed income at historic lows.

One place to look for stable dividends is in quality companies with steady earnings and which tend to increase their dividends. As a proxy for these types of companies, we look to the S&P 500 Dividend Aristocrats Index which consists of a list of companies—mainly well-known, large-cap, blue-chip companies—in the S&P 500 with a track record of increasing dividends for at least 25 consecutive years. The performance of this index is compared to the DJ Select US Dividend Index a broad market index which tracks stocks with the highest dividend yields. In addition, we compare both indexes to the S&P 500 Index. Since data was available for DJ Select US Dividend Index starting in February 1992, we compared the performance of the three indexes from February 1992 through December 2020.

It can be seen from the table below that high dividend stocks have a long history of performing as well if not better than the S&P 500. However, some classifications of dividend stocks have outperformed others. Since February 1992, the total return of the S&P 500 Dividend Aristocrats Index has been higher than the DJ Select Dividend Index and the S&P 500 Index. In addition, it has done so with lower volatility, subsequently having a higher Sharpe Ratio. Even over the last ten years (January 2011 – December 2020) when it has been difficult for Value stocks to outperform the S&P, the S&P 500 Dividend Aristocrats Index has fared as well as the S&P 500 with less volatility.


1 The S&P 500 Dividend Aristocrats Index was launched in May 2005. Performance data before that date was backfilled.

2 The DJ Select US Dividend Index was launched on November 3, 2003. Performance data before that was backfilled.


Source: Bloomberg

Dividend paying stocks have a long history of outperforming the S&P. However, both in terms of potential higher returns and lower volatility, high quality dividend paying stocks appear to have divided and conquered the highest yielding dividend stocks.

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