The top-yielding quintile of the Standard & Poor’s 500 Composite Index had the worst returns in 2009 and the best returns in 2011. We are often asked the question, “Where do these stocks go from here?” While there may be some value in trying to time an entry point into dividend-focused strategies, there is only so far one can go with that approach; we believe it is best to take a strategic, long-term approach to dividend investing.
At Capital Guardian and American Funds, we believe that both dividend-growth and dividend-income strategies should be a core part of an equity allocation for reasons that are well-recognized but less-followed — the dependability of the return stream and the potentially lower volatility of the equity exposure. While investors look for a myriad of ways to reduce equity beta risk, surprisingly, they often do not look to reduce that risk within the equity exposure itself. Yet, a well-diversified dividend strategy, and particularly a dividend-growth strategy, can contribute meaningfully toward that goal.
Several of Capital Guardian and American Funds’ dividend-focused funds have historically exhibited lower volatility than that of the broader market. Moreover, as the world economy undergoes a great global rebalancing, with developed markets in a low-growth environment while emerging markets continue to drive global growth, there is a high likelihood that dividends will become a greater part of total equity return.
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