Why are dividend paying stocks down this year, and what's the outlook?

Dividend and value stock investors have had a tough year so far. While we discussed big tech and communications pulling the S&P and Dow Jones prices forwards, not all stocks have recovered. In fact, more than half of the companies in the S&P 500 and the Dow Jones 30 are negative for the year. What gives?

The simple explanation is that most of the companies in the index are tied closely to the “real economy”- those cyclical sectors which are more dependent on strong consumer finances. Banks, real estate, travel, restaurant, industrial’s, energy, and even utilities are all down substantially for the year. Unfortunately, most of these sectors make up the high-dividend end of the market- which has suffered in 2020:

It’s clearly been rough for investors who’ve chosen to invest in dividend payers- historically these stocks tend to lose less during recessions and earn more over the long run.

However, we believe now is not the time to abandon these holdings. Although it’s been a strange year in many ways, letting short-term under-performance change your investment strategy is usually a bad idea.

Most people would expect the US economy to eventually rebound (like it always has), and dividend-paying stocks to come back with it. After all, while unsexy, they’re responsible for a significant portion of stock investors historical total return:

Per Hartford- Going back to 1970, 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding (click the picture for the full whitepaper)

Given today’s record low-interest rates and a recovering economy, investors might want to reconsider their position in dividend-paying stocks. If you believe markets eventually revert to their averages, now might be a good time to do some dividend hunting.