How does the dividend strategy perform in the US stock market?

Investment Highlights

1. How does the dividend strategy perform in the U.S. stock market?

1.1. The performance of the dividend strategy in the U.S. stock market has been better than the S&P 500 index and more stable in the long term.

• Over the long term, the dividend strategy in the U.S. stock market has outperformed the broad market index. Over the past twenty years, the annualized returns of the Dow Jones U.S. Dividend 100 Index, S&P 500 Quality High Dividend Index, S&P 500 Dividend Aristocrats Index, S&P 500 High Dividend Index, and S&P 500 Index were 11.7%, 12.0%, 11.3%, 9.4%, and 10.5% respectively. Among them, the annualized return of the S&P 500 Quality High Dividend Index exceeded the S&P 500 Index by 1.5 percentage points.

• During downturns in the U.S. stock market, the S&P 500 Quality High Dividend Index often achieves better returns. Since 2000, there have been four major market downturns in the U.S., corresponding to the time periods from September 2000 to October 2002, October 2007 to March 2009, February 2020 to March 2020, and January 2022 to October 2022. The performance of the S&P 500 Index (total return) during these periods was -47.4%, -55.3%, -33.8%, -24.5%, while the performance of the S&P 500 Quality High Dividend Index (total return) was +4.0%, -49.0%, -39.7%, -12.4%.

1.2. Comparison of the performance of the S&P 500 Quality High Dividend Index and the S&P 500 Index in different periods

• Looking at different periods, whether during the strong U.S. economic phase from 2003 to 2007 or the low-interest-rate phase from 2011 to 2019, the S&P 500 Quality High Dividend Index has outperformed the S&P 500 Index. 1) From 2003 to 2007, a period of strong U.S. economic growth, the annualized return of the S&P 500 Quality High Dividend Index exceeded the S&P 500 Index by 2.4 percentage points. 2) From 2011 to 2019, during the low-interest-rate era in the U.S., the annualized return of the S&P 500 Quality High Dividend Index exceeded the S&P 500 Index by 0.8 percentage points.

2. Where does the return of the dividend strategy come from?

2.1. Breakdown of the return of the S&P 500 Quality High Dividend Index

• During periods of strong U.S. economic growth, buyback yield and price return are the main drivers of its total return. During the resilient U.S. economy from 2003 to 2007, the annualized return of the S&P 500 Quality High Dividend Index was 15.1%, with price and buyback yield contributing 10.5% and 2.9% respectively, and dividend yield contributing 1.6%

• During the "low interest rate" period, the dividend return has increased. From 2011 to 2019, during the "low interest rate" period in the United States, the annualized return of the S&P 500 High Dividend Index was 14.2%, with dividend yield, buyback yield, and price return of 2.8%, 3.0%, and 8.3% respectively.

2.2 Analysis of Dividend and Buyback Returns by Industry in the S&P 500 High Dividend Index

• Looking at the current industry distribution of the S&P 500 High Dividend Index, 1) in terms of the proportion of constituent stocks, the number of stocks in core consumer goods, industrial, and energy industries is the highest; 2) in terms of market value proportion, core consumer goods, energy, and industrial sectors have the highest market value proportion.

• By industry, whether in a strong economic phase or a low interest rate period, the telecommunications sector leads by a significant margin in terms of buyback + dividend yield compared to other industries; when splitting buyback and dividend yield, the utilities and information technology sectors have higher buyback yields, while the real estate and energy sectors have higher dividend yields.

Three, Investment Ideas for Dividend Strategies

3.1 Investment Ideas for Dividend Strategies Using the S&P 500 High Dividend Index

• Looking at the composition method of the S&P 500 High Dividend Index, it considers both the quality of the underlying assets and the dividend yield. In terms of quality: the S&P 500 High Dividend Index selects targets with high ROE, low Accruals Ratio, and low Financial Leverage Ratio. In terms of dividend yield: it selects targets with a high indicated annual dividend yield for the next 12 months.

• The per-share dividends of the constituent stocks have a high compound annual growth rate. From 2003 to 2023, the median compound annual growth rate of per-share dividends of the current constituent stocks of the S&P 500 High Dividend Index is close to 10%, with a CAGR exceeding 13% during the period of rising U.S. economic growth from 2003 to 2007.

• Behind this are mainly stable profitability, high profit growth, ample free cash flow, and excellent corporate governance culture support.

  1) Stable profitability: The median ROE of the current constituent stocks of the S&P 500 High Dividend Index in 2023 is 23%. 2) High profit growth: Over the past twenty years, the median compound annual growth rate of EPS of the current constituent stocks of the S&P 500 High Dividend Index is nearly 8%, and from 2003 to 2007, the median compound annual growth rate of EPS even exceeded 16%. 3) Ample free cash flow: Over the past twenty years, the median compound annual growth rate of free cash flow per share of the current constituent stocks of the S&P 500 High Dividend Index exceeds 7%, rising to 12% during the period from 2003 to 2007 4) Excellent Equity Culture: The median annual dividend payout ratio of the current components of the S&P 500 High Dividend Index for 2023 is 53%.

3.2. Related ETFs and List of Current Components of the S&P 500 High Dividend Index

For related ETFs tracking the S&P Dividend Index and the list of current components, please refer to the main text.

Main Report

I. How Does the Dividend Strategy Perform in the U.S. Stock Market?

1.1. Long-Term Performance of Dividend Strategy in the U.S. Stock Market Outperforms the S&P 500 Index and is More Stable

Long-term, the dividend strategy in the U.S. stock market has been able to achieve better returns than the S&P 500 Index.

• Over the past twenty years, from 2003 to 2023, on an annualized basis, the returns of the Dow Jones U.S. Dividend 100 Index, S&P 500 High Dividend Index, S&P 500 Dividend Aristocrats Index, S&P 500 High Dividend Yield Index, and S&P 500 Index were 11.7%, 12.0%, 11.3%, 9.4%, and 10.5% respectively. Among them, the annualized return of the S&P 500 High Dividend Index exceeded the S&P 500 Index by 1.5%.

During downturns in the U.S. stock market, the S&P 500 High Dividend Index often achieves better returns.

• Since 2000, there have been four major market downturns in the U.S., corresponding to the time periods from September 2000 to October 2002, October 2007 to March 2009, February 2020 to March 2020, and January 2022 to October 2022. During these periods, the performance of the S&P 500 Index (total return) was -47.4%, -55.3%, -33.8%, -24.5%, while the performance of the S&P 500 High Dividend Index (total return) was +4.0%, -49.0%, -39.7%, -12.4%.

1.2. Comparison of Performance of S&P 500 High Dividend Index and S&P 500 Index in Different Phases

In different phases, whether during the strong U.S. economy phase from 2003 to 2007 or the low-interest rate phase from 2011 to 2019, the S&P 500 High Dividend Index has outperformed the S&P 500 Index.

• From 2003 to 2007, with the U.S. nominal GDP growth rates reaching 4.8%, 6.6%, 6.7%, 6.0%, 4.8%, during the strong economy period, the S&P 500 Index had an annualized return of 12.1%, while the S&P 500 High Dividend Index had an annualized return of 14.6%, outperforming the S&P 500 Index by 2.4%
• From 2011 to 2019, the United States entered a low-interest rate era, with the central movement of the 10-year US Treasury yield. From 2011 to 2019, the annualized returns of the S&P 500 High Dividend Index and the S&P 500 Index were 14.1% and 13.3% respectively, with the S&P 500 High Dividend Index outperforming the S&P 500 Index by 0.8 percentage points.

2. Where Does the Return of Dividend Strategy Come From?

2.1. Breakdown of Returns of the S&P 500 High Dividend Index

Over the past twenty years, the compound annual return of the S&P 500 High Dividend Index has been 12%, with returns from dividends and buybacks at 2.5% and 2.8% respectively, and returns from prices at 6.5%.

During periods of strong US economic growth, buyback yields and price returns are the main support for its total return. From 2003 to 2007, the US economy showed resilience, with the S&P 500 High Dividend Index achieving an annualized return of 15.1%, mainly driven by the increase in returns from prices and buybacks, reaching 10.5% and 2.9% respectively.

During the "low-interest rate" period, dividend returns have increased. From 2011 to 2019, the US entered a "low-interest rate" era, with the S&P 500 High Dividend Index achieving an annualized return of 14.2%, with dividend yield, buyback yield, and price return at 2.8%, 3.0%, and 8.3% respectively, with a significant increase in dividend yield.

2.2. Analysis of Dividend and Buyback Returns by Industry for the S&P 500 High Dividend Index

Looking at the current industry distribution of the S&P 500 High Dividend Index,

1) First, from the perspective of the number of constituent stocks, the number of constituent stocks in core consumer goods, industrial, and energy industries is the highest, accounting for 31.3%, 18.8%, and 12.5% respectively. Compared to 2018, the number of constituent stocks in core consumer goods, industrial, and materials industries has increased significantly, with the number of constituent stocks in these three industries increasing by 15.5%, 5.6%, and 3.9% respectively.

2) Secondly, in terms of market value distribution, core consumer goods, energy, and industrial sectors have the highest market value distribution, reaching 31.4%, 20.4%, and 19.5% respectively. Compared to 2018, the market value distribution of core consumer goods, industrial, and financial sectors has increased significantly, with the market value distribution of these three industries increasing by 14.2%, 11.8%, and 3.4% respectively Whether in a strong economic phase or a low interest rate period, the buyback + dividend yield of the telecommunications service industry far outperforms other industries; looking at the breakdown of buyback and dividend yield, the buyback yield of utilities and information technology industries is higher, while the dividend yield of real estate and energy industries is higher.

• In terms of buyback yield, 1) from 2003 to 2023, utilities, information technology, and telecommunications services have higher buyback yields, with annualized figures reaching 5.0%, 4.5%, and 4.1% respectively. 2) From 2003 to 2007, during a strong U.S. economy, telecommunications services, utilities, and information technology industries had higher buyback yields, with annualized returns of 9.3%, 6.2%, and 5.1% respectively. 3) From 2011 to 2019 in a low interest rate environment, utilities, information technology, and financial industries had higher buyback yields, reaching 5.9%, 4.8%, and 4.4% respectively.

• In terms of dividend yield, 1) from 2003 to 2023, the telecommunications services, real estate, and energy industries had higher dividend yields, with annualized figures of 5.5%, 4.1%, and 3.6% respectively. 2) From 2003 to 2007, real estate, energy, and financial industries had higher dividend yields, reaching 3.9%, 3.2%, and 2.1% respectively. 3) From 2011 to 2019, the industries with higher dividend yields were telecommunications services, real estate, and energy industries, with dividend yields of 8.2%, 3.7%, and 3.5% respectively.

III. Investment Ideas for Dividend Strategies

3.1. Investment Ideas for Dividend Strategies Using the S&P 500 Quality High Dividend Index

The S&P 500 Quality High Dividend Index considers both the quality of the underlying assets and the dividend yield.

• Quality: The S&P 500 Quality High Dividend Index selects targets with high ROE, low Accruals Ratio, and low Financial Leverage Ratio.

• Dividend Yield: It selects targets with a higher forecasted dividend yield for the next 12 months

Due to the difficulty in tracing historical component stocks, by observing the quality and dividend yield characteristics of the current S&P 500 High Dividend Index component stocks, we can find:

Stable profitability is the main reason supporting its high dividends. The median ROE of the S&P 500 High Dividend Index component stocks in 2023 is 23%.

Higher profit growth is also one of the reasons supporting its high dividends. From 2003 to 2023, the median compound annual growth rate of EPS of the S&P 500 High Dividend Index component stocks is close to 8%, with the median compound annual growth rate of EPS even exceeding 16% from 2003 to 2007; under the "low interest rate" background from 2011 to 2019, the median compound annual growth rate of EPS can also reach over 6%.

Sufficient free cash flow is the pillar of high dividend growth per share. Over the past twenty years, the median compound annual growth rate of free cash flow per share of the S&P 500 High Dividend Index component stocks is over 7%, even exceeding 12% from 2003 to 2007. With sufficient free cash flow support, the compound annual growth rate of dividend per share is relatively high. From 2003 to 2023, the median compound annual growth rate of dividend per share of the S&P 500 High Dividend Index component stocks is close to 10%, with the CAGR of dividend per share even exceeding 13% from 2003 to 2007 during the period of high U.S. economic growth.

Under excellent equity culture, companies with a high proportion of dividend payout have a strong willingness to distribute dividends, thereby bringing substantial dividend returns to investors. The median annual dividend payout ratio of the current component stocks of the S&P 500 High Dividend Index in 2023 is 53%.

3.2. List of related ETFs and current component stocks of the S&P 500 High Dividend Index

ETFs tracking the S&P 500 High Dividend Index include QDIV, with assets under management of 0.3 billion USD as of August 19, 2024.

ETFs tracking the S&P 500 Dividend Aristocrats Index include NOBL and KNG in the U.S., 429000 in South Korea, and 2236 in Japan. As of August 19, 2024, the assets under management of the above-mentioned ETFs are 121 billion USD, 31 billion USD, 0.45 billion USD, and 0.3 billion USD, respectively.

Author: Zhang Yidong (S0190510110012), Li Yanlin, Chi Yuyi, Source: Zhang Yidong Strategy World, Original Title: "Another Core Asset of US Stocks by CICC Zhang Yidong (Global Strategy) Team"