Dividend Risk Falling With Rates

August 12, 2019

Some Rejoice

Figure 2 displays the relative performance of the MSCI USA High Dividend Total Return Index versus the S&P 500 Index and the relative performance of the iBoxx BBB-rated Index versus the Bloomberg/Barclays US Treasury 7-10 Year Index.

Rather than showing absolute YTD performance of high dividend strategies and BBB credit, we are showing relative performance by neutralizing much of the market risks associated with equities and fixed income, respectively.

As a risk factor, high dividend strategies have lagged the broader market this year, while lower investment-grade corporate credit has handily outperformed U.S. Treasuries; lenders are enjoying the fruits of the corporate balance sheet diet; dividend recipients not so much.


Figure 2: Cumulative Log Excess Return YTD Through July 2019


Granted, it has not been a terrible year for dividend-paying strategies. They have still benefited from a strong U.S. market advance. However, it’s clear that credit investors have enjoyed greater “risk” compensation. Dividend recipients have faced the prospect of no dividend growth/dividend cuts.

Some might dismiss the high-dividend underperformance as style-specific given that “price”-driven strategies (i.e., value, yield) have underperformed “growth” this year. Indeed, “dividend growth” has outperformed “high dividend” (Figure 3).


Figure 3: ‘Dividend Growth’ Outperforming ‘High Dividend’ (YTD through 7/31/2019)


Source: Bloomberg

(For a larger view, click on the image above)


Low Vol Rides Lower Rates Higher

However, low volatility strategies have also performed well this year, on a market beta-adjusted basis (unusual given the strength in this year’s market advance). Low volatility has likely benefited from the large drop in interest rates this year, but high-dividend strategies should have also benefited from a combination of lower interest rates and narrower credit spreads. Yet high dividend has lagged most other smart beta strategies in 2019.

In our December article, we showed the portfolio-weighted credit rating exposures of the top 10 dividend-focused ETFs (based on AUM) tracked by ETF.com (Figure 4). We calculated the portfolio-weighted credit rating exposures based on the senior unsecured credit ratings assigned by Moody’s and S&P.


Figure 4: Credit Risk Exposures Of Dividend-Focused ETFs & The S&P 500 (12/13/2018)


(For a larger view, click on the image above)


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