Dividend-paying stocks often outperform the market following periods in which they lag
That’s not a typical reaction, either from advisers or investors, especially when a group of stocks has underperformed the broad market by double-digit amount s— as many dividend-stock funds and ETFs have done over the last 12 months. But history suggests that these strategies could very well bounce back in a big way in coming months.
This oscillation is evident in the chart above. It was constructed by taking the trailing 12-month total return of the 10% of stocks with the highest dividend yields and subtracting the comparable return of the S&P 500 SPX. The latest alpha is lower than negative 15 percentage points. Since 1940, it’s been lower than today’s level just 7% of the time. The chart certainly suggests that dividend stocks’ alpha over the next 12 months may be positive — and perhaps strongly so.
There are no guarantees that the bounceback will occur this time around. But at a minimum the historical record suggests that dividend-stock investors should not throw in the towel just because of the past 12 months’ disappointing performance. And the gutsy among you might want to go further and buy more dividend stocks at today’s depressed prices.
The dividend ETFs in the table above each claim to do that. Another approach is illustrated in the table below, which lists the highest-yielding stocks among those currently recommended by at least three of the investment newsletters my performance auditing firm monitors.
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