The Rising Importance of High Dividend Stocks

Aug 3, 2016

  • Low interest rates and increasing longevity have created a growing need for investments that can potentially deliver both income and growth
  • According to Fama and French’s research, the highest decile of dividend paying stocks have historically delivered yields averaging 6.4%, while exceeding the total returns of the S&P 500 by nearly 3.2% on an annual basis
  • The Global X SuperDividend family of ETFs seek to provide an efficient means of gaining exposure to among the highest dividend payers across various geographies and asset classes

Retirement Now Requires Income & Growth

Traditional fixed income instruments have historically played an important role in achieving investors’ income needs. From 1960 to 2015, 10-year US treasuries delivered an average yield of 6.3%, which often provided a high level of income to investors with a relatively minimal level of risk. The current economic climate of dovish central bank policies, however, has resulted in low, and even negative interest rates, which has caused a deep gap between many investors’ income needs and the income often provided by traditional fixed income investments.

The chart below shows the nominal yield of 10-year US treasuries versus the 4% yield figure many investors target to draw regular income from their retirement portfolios. For the last 8 years, 10-year US treasuries have failed to deliver 4% yields and on numerous occasions have fallen below 2%. Given that bond yields are so low, many retirees could be forced to sell their principal to make up for inadequate income from bonds.

US 10 Year Treasury Rates

Past performance is no guarantee of future results.

The issue of this pronounced yield gap is exacerbated by the fact that the time spent in retirement is longer than ever.  According to researchers, the number of years in retirement has risen from 13 in 1962 to 20 in 2013, and is expected to continue rising as people enjoy longer lifespans1. While investors are receiving sparse yield from bonds, they also need their retirement savings to last over two decades. Therefore, selling one’s principal to make up for the yield gap introduces an acute danger to retirees: longevity risk, or the risk of outliving their retirement savings.

Years in Retirement

In order to combat the low yield environment and prepare for extended retirements, investors need strategies that can deliver both high enough yields to meet their current income needs and opportunities to grow their principal, which can potentially mitigate longevity risk.

A Look into High Dividend Stocks2

High dividend paying stocks have historically demonstrated the potential to deliver both high income as well as the opportunity to grow one’s principal. To analyze high dividend stocks, we utilized Nobel laureates Eugene Fama and Kenneth French’s research portfolios which ranked all dividend paying stocks in the US and placed them into one of 10 buckets, or deciles, based on their yield3. We specifically looked at the performance and characteristics of just the highest decile of dividend yielders, the top bucket, based on these Fama & French portfolios from 1960 to 2015.

We found that the highest decile of dividend stocks (“the high dividend portfolio”) delivered an average yield of 6.4% with total annualized returns of approximately 13.0%. These total returns exceeded the S&P 500’s annualized returns of approximately 9.8% by nearly 3.2%. Some of this outperformance can be attributed to the deep value-like characteristics of high dividend stocks, as value stocks have historically outperformed the S&P 500. Historically, the high dividend portfolio has demonstrated a correlation of just 0.58 to the S&P 500, but this figure rises to 0.75 when compared to the S&P 500 Value Index4. In addition, this high dividend portfolio delivered superior risk-adjusted returns when compared to the S&P 500 of 0.84 versus 0.78, demonstrating a better risk-return tradeoff.

High Dividend Stock Returns

An important characteristic of the high dividend portfolio is that approximately 50% of its total returns have come from dividends paid by the stocks in the portfolio, a figure higher than any other decile of dividend paying stocks.

Dividends vs. Price Returns

This means that the price appreciation for high dividend portfolio was annualized at approximately 6.4%, while the income generated by the portfolio represented approximately another 6.4%. If dividends were not reinvested (for example, the dividends were treated as income and spent), the price returns or growth of principal of this strategy would have lagged the S&P 500. However, the historically high yield combined with the price appreciation of the underlying stocks demonstrates that this strategy focused on the highest tier of dividend payers has resulted in both high income and portfolio growth.

(Read our full report on High Dividend Stocks, including how they perform in rising rate environments here.)

An ETF Suite for High Dividend Payers

Many dividend-focused ETFs seek broad exposure to dividend stocks, often accessing equities that rank among the top 25% or 50% of dividend payers in the market. The Global X family of SuperDividend ETFs takes a different approach, seeking to provide exposure to only the highest dividend payers in a given geography or asset class, in an effort to maximize the potential income from its holdings. This strategy was heavily influenced by Fama and French’s research portfolios on high dividend paying stocks discussed above, which demonstrated that the highest decile of dividend paying stocks not only has historically generated high income, but has also outperformed the S&P 500 on a total return basis.

SDIV Chart 2

The SuperDividend family of ETFs consists of three geography-based and three asset class-focused funds:


Asset Class

Below is a comparison of the yields of each SuperDividend ETF compared to recognizable benchmarks for its segment.


Click on the fund tickers linked above for standardized performance of each ETF individually.

SuperDividend Benchmarks

We believe the SuperDividend suite of ETFs can be useful additions to a portfolio to potentially enhance its yield, while maintaining the potential for growth of principal. This yield can potentially be used to meet current income needs that are not being met by traditional income-generating asset classes, like government and investment grade corporate bonds. In addition, the yield can be reinvested and potentially generate returns even in sideways markets or low growth environments.

Category: Articles

Topics: Dividends, Income Strategies

U.S. Treasury securities are considered to be of high credit quality and are backed by the full faith and credit of the U.S. government. U.S. Treasury securities, if held to maturity, guarantee a return of principal while no other securities mentioned in this material offer such a guarantee.

Investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. In addition, preferred stock may not pay a dividend, an issuer may suspend payment of dividends on preferred stock at any time, and in certain situations an issuer may call or redeem its preferred stock or convert it to common stock. High yielding stocks are often speculative, high risk investments. These companies can be paying out more than they can support and may reduce their dividends or stop paying dividends at any time, which could have a material adverse effect on the stock price of these companies and the Fund’s performance.

The potential benefits of investing in MLPs depend on them being treated as partnerships for federal income tax purposes. Further, if the MLP is deemed to be a corporation then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distributions to the fund which could result in a reduction of the fund’s value. The risks associated with real estate investment trusts including interest rate risk which may cause certain REIT holdings to decline in value if interest rates increase. REITs are subject to general risks related to real estate including default risk and the possibility of decreasing property values. Diversification does not prevent all investment loss. Real estate is highly sensitive to general and local economic conditions and developments, and characterized by intense competition and periodic overbuilding. Many real estate companies, including REITs, utilize leverage (and some may be highly leveraged), which increases risk and could adversely affect a real estate company’s operations and market value in periods of rising interest rates.

ALTY may invest in MLPs, infrastructure investments, REITs, mortgage REITs, convertibles, preferred stocks, senior loans, currency trading, long/short credit, business development companies (“BDCs”), private equity, alternative strategy managed portfolios- and option-writing and therefore may be subject to all underlying risks. ALTY is non-diversified. ALTY may invest in derivatives, which are often more volatile than other investments and may magnify the Fund’s gains or losses.

There is no guarantee that dividends will be paid.

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Global X NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the Mid- Point between the Bid and Ask price as of the close of exchange.

Carefully consider the fund’s investment objectives, risks, and charges and expenses. This and other information can be found in the fund’s summary or full prospectus. Please read the prospectus carefully before investing.

Funds distributed by SEI Investments Distribution Co. Global X Management Company, LLC serves as an advisor to the Global X Funds. The Global X Funds are distributed by SEI Investments Distribution Co., One Freedom Valley Drive, Oaks, PA, 19456, which is not affiliated with Global X Management Company or any of its affiliates.