By Nasdaq Global Information Services
New Research Shows that Dividend-Focused Stocks Bring High Performance and Low Volatility
As we’ve seen with the aftermath of the U.K.’s Brexit vote, one event can drive volatility in the markets quickly and significantly. Those who play the market understand that there is risk inherent in all investments, however, one asset class has both outperformed its peers and offers a continuous relative safe haven in times of volatility, and that is dividend-focused index funds.
Indexes constructed with dividend-paying stocks are some of the first significant building blocks of the smart beta market, and it’s easy to see why they continue to be popular. In today’s very low-interest rate and volatile investment climate, investors are continually attracted to strategies that are low-volatility, high performance and high quality. A dividend-based index hits all of these points.
Dividend-focused indexes are comprised of securities from public companies that pay dividends to shareholders (see Nasdaq Dividend Achievers TM ). There are several advantages to this approach that help insulate these funds from volatility. These companies are typically older, more established and have stood the test of time. The fact that they pay regular dividends to shareholders attests to both their stability as a company and to their cash position at any given moment. A company that is prepared to send cash to its shareholders is less likely to take unmitigated risks and is more likely to have substantial cash on hand.
A dividend track record correlates to low volatility. In both five-year and year-to-date reviews of dividend-based indexes versus non-dividend-based indexes, the dividend side outperforms. Specifically, the Nasdaq U.S. Dividend Achievers™ 50 Index (DAY) had a lower annualized volatility (14.5%) compared with the S&P 500 (15.7%) over the last five years. It also outperformed the S&P 500 Low Volatility High Dividend (107.1% vs. 94.8%) and the Morningstar Dividend Yield Focus Total Return Index (107.1& vs. 79.4%) over that same period. Both of those competing indexes are based on a one-year trailing yield rather than a long historical track record of dividend payments. In short: the more dividend distribution, the sweeter the volatility cushion.
Successive volatile trading environments have put stocks and index investing to the test. Dividend-paying stock index investing has demonstrated its track record as a top performer and sound port of call during volatile times.
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