Portfolio construction
Why dividends matter more than you think
Does your portfolio have enough dividend exposure?
Companies that offer higher dividends and more sustainable dividend growth can provide significant downside protection and help guard against inflation. Yet the Capital Group Portfolio Consulting and Analytics team found that most portfolios showed a minimal increase in higher dividend payers as portfolios became more conservative. Here’s why we think it’s time to take a close look at dividends.
Dividends roadmap
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Average dividend exposure
Limited exposure to dividend payers for income goals versus American Funds Model Portfolios
Equity yield exposure
The Capital Group Portfolio Consulting and Analytics team analyzed 2,127 portfolios in consultation with financial professionals from January 1, 2021 to December 31, 2021. During these consultations, portfolio objectives were discussed and aligned to the American Funds Model Portfolio objectives. The American Funds Model Portfolios include a suite of models with objectives ranging from growth and growth & income to income and preservation.
Most income-focused portfolios managed by financial professionals have limited exposure to dividend payers based on our analysis. We suggest rethinking this and recommend increasing dividend allocations for certain client goals. For example, American Funds Model Portfolios have significantly higher allocations to substantial dividend payers in growth & income and income portfolios.
“Capital Group takes a nuanced approach to asset allocation with a recharacterization of both equity and fixed income securities as portfolio objectives change. Shifting to higher dividend payers can have a significant impact on your portfolio, offering potential for better downside capture, increased inflation protection and diversified income sources.”
—MIA YAMMINE
Portfolio consultant
downside protection
Potential for better downside capture
30-year downside capture* across dividend buckets
Data based on annual returns from 12/31/1991–11/30/21 for a set of 3,358 companies as of 11/30/21. This universe of companies has varied during the 30-year period. Sources: Dartmouth — Fama/French, Morningstar
* Downside capture ratio measures how a fund fared relative to the index during market declines. A downside capture ratio less than a 100 indicates that a fund lost less than the index for a given period; a ratio greater than 100 indicates the fund lost more than the index.
High-dividend paying stocks have historically offered more downside protection compared to low and non-dividend payers, according to data from Fama and French. Higher dividend payers have shown more attractive 30-year downside capture, losing significantly less than the S&P 500 Index than lower dividend payers. In general, dividends can be a sign of stability for companies, with many firms recently reinstating dividends after dramatically cutting them in 2020.
How well have your funds fared in major market corrections?
durable income and inflation protection
Quality matters
Equity and fixed income yields based on credit quality
Data as of 12/31/21. Sources: Bloomberg/Factset.
*Yield-to-worst is the lowest yield that can be realized by either calling or putting on one of the available call/put dates, or holding a bond to maturity. Yield-to-worst figures are a weighted average of the yield-to-worst for each credit grouping. The credit groupings are based on U.S. corporate bonds within the Bloomberg U.S. Credit and the Bloomberg U.S. Corporate High Yield indexes. Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.
Using dividends as a source of income has the potential to improve the credit quality of your investments. While higher yielding fixed income investments typically take on greater credit risk, equity investments tend to see increased yields from more highly rated companies. We take a bottom-up, fundamental approach to evaluating the quality of dividend-paying companies and the sustainability of dividend yields.
durable income and inflation protection
Inflation protection over the long run
30-year average annual dividend growth for the S&P 500 Index and Washington Mutual Investors FundSM (WMIF) versus the Consumer Price Index (CPI)
Data from 12/31/91 through 12/31/21. Source: Capital Group
Dividend income growth may help protect against rising inflation. Over the last 30 years, the dividend growth rates of both the S&P 500 and Washington Mutual Investors Fund (WMIF) — a high-quality dividend focused strategy — have significantly outpaced the Consumer Price Index (CPI). During the period of high, rising inflation from 1965–1982, CPI averaged 6.6% per year; WMIF averaged 8.7% annual dividend growth while the S&P 500 averaged 5.9%. Dividend growth can signal management’s commitment to rigorous capital allocation.
“Because [dividend payers] are committed to setting aside some proportion of their earnings for investors, they tend to have better discipline and may be less likely to make some ill-advised acquisition.”
—JOYCE GORDON
Portfolio manager
Is your portfolio short on dividend payers?
solution
Focus on dividend-oriented funds and models
Challenge
Insufficient dividend exposure to meet clients’ income and preservation goals.
Solution
Consider dividend-focused funds like Washington Mutual Investors Fund (WMIF) and Capital Group U.S. Income and Growth SMA*, as well as model portfolios that allocate to higher dividend payers for specific goals.
*The Capital Group U.S. Income and Growth SMA has a similar strategy to WMIF.
Spotlight on Washington Mutual Investors Fund
Substantial dividend growth
WMIF has seen dividend income increases in 66 out of 68 years.*
Attractive downside capture
WMIF
- 5-year: 93%
- 10-year: 91%
- 30-year: 79%
Data as of December 31, 2021. Sources: Factset, Morningstar.
*Based on hypothetical initial investment of $10,000 made on December 31, 1952. Washington Mutual Investors Fund was launched on July 31, 1952. The fund's annual dividend income (excluding special dividends) has increased 66 out of 68 years through 2021.
Washington Mutual Investors Fund
Learn more about WMIF
Portfolio Construction Concepts
PORTFOLIO CONSTRUCTION
PORTFOLIO CONSTRUCTION
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