Stable, reliable, safe—loads of investment commentary use words like these to describe dividend-paying stocks. Many experts make high-dividend stocks seem both sensible and special—a crucial part of “income investing” strategies frequently pitched to retirees. In Fisher Investments’ view: Dividend stocks are simply, well, stocks. They possess no magic—and overreliance on them may raise risks many investors overlook.
Contrary to popular belief, dividends aren’t an extra return on your investment—they are a return of your principal. When a company issues a dividend, the price of its stock adjusts downward by the amount of the dividend. Hence, any “bonus” a dividend provides is canceled out by the corresponding decline in the stock’s price. That makes dividends a piece of your total return. But they are really only additive to total returns if reinvested.
We like dividends just fine, and high-dividend stocks have done quite well at times. But Fisher Investments doesn’t think it is beneficial to target high dividends alone as a strategy. For instance, despite talk of their steady reliability, dividends can shrink—or disappear entirely, torpedoing the “income” part of an income investing strategy. When companies seek to cut costs and hoard cash to survive a recession, dividends often end up on the chopping block.
Take 2020. As COVID-19 spurred widespread lockdowns, cash-strapped companies slashed an estimated $220 billion in dividend payments globally from April through December.[i] In many cases, central banks—including the Federal Reserve and European Central Bank—barred or limited financial firms’ dividend payments to ensure they maintained sufficient capital buffers.[ii] The cutbacks went beyond Financials, though. Other longtime dividend payers pared payouts, too. As oil demand plunged and uncertainty soared, Royal Dutch Shell slashed its first-quarter dividend -66% versus the year-ago quarter—its first cut since 1945.[iii]
Firms similarly reduced dividends during the 2008–2009 financial crisis, when big bank cutbacks spurred a nearly $44 billion year-over-year decrease in US firms’ Q1 2009 payouts.[iv] Moreover, dividend reductions aren’t limited to crises or bear markets. In 2016—amid a global expansion and bull market—oil giant ConocoPhillips slashed its payout by two-thirds while Rolls-Royce chopped its dividend in half, a telling reminder that the dividends income investing strategies target are neither a bonus nor a guarantee.[v]
Moreover, dividend stocks’ performance isn’t superior to others, Fisher Investments has found. Like any category—e.g., large-cap, small-cap, growth, value—dividend stocks’ performance varies over time and can lag for lengthy stretches. In the 10 years through November 2021, the MSCI World High Dividend Yield Index gained 118.6%, barely half of world stocks’ overall 216.8% return.[vi] Additionally, dividend-focused income investing strategies don’t provide an automatic “cushion” during bear markets, as some contend. Yes, they did outperform slightly during the flash 2020 bear market, with global high-dividend-yield stocks sinking -32.7% versus world stocks’ -34.0% decline.[vii] But during the 2007–2009 bear market, high-dividend-yield stocks tumbled -63.4% compared to world stocks’ -57.8% fall.[viii]
Dividend-heavy income investing portfolios can also skew towards certain sectors or industries, creating unintended overweights or underweights. As the following exhibit shows, a portfolio focused on dividend payers may lead to a greater concentration of Health Care and Consumer Staples stocks and less exposure to Tech and Tech-like stocks, which feature prominently in the MSCI World Index.
Exhibit: Index Weightings by Select Sectors and Industries
In our view, this structural difference explains much of dividend stocks’ leadership shifts. They lead when the sectors they dominate lead, and they lag when sectors where they clump slump.
None of this means high-dividend stocks are inherently bad, in Fisher Investments’ view. But they aren’t special, either. They are simply one type of stock—and income investing strategies hyperfocused on them can lead to unintended portfolio tilts that dent performance for long stretches. We think investors should focus on building well-diversified portfolios designed to provide enough growth to last through retirement or beyond—whether that includes dividend stocks or not.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] “Pandemic Caused $220 Billion of Global Dividend Cuts in 2020, Research Says,” Holly Ellyatt, CNBC.com, 02/22/2021.
[ii] “European Bank Dividend Ban Lifted, but Restrictions Remain,” Patricia Kowsmann, The Wall Street Journal, 12/15/2020.
[iii] “Here’s Why Oil Giant Shell Has Cut Its Dividend for the First Time Since World War II,” Isabel Togoh, Forbes, 04/30/2020.
[iv] “S&P Dow Jones Indices Reports $5.5 Billion Decrease in U.S. Indicated Dividend Payments for Q1 2020; Worst Quarter Since Q1 2009,” S&P Dow Jones Indices, 04/09/2020.
[v] “Conoco Cuts Dividend for First Time in 25 Years on Crude Crash,” Staff, Reuters, 02/04/2016, and “Rolls-Royce Cuts Dividend for First Time in Almost 25 Years,” Julia Kollewe, The Guardian, 02/12/2016.
[vi] Source: FactSet, as of 12/09/2021. MSCI World Index and MSCI World High Dividend Yield Index returns with net dividends in USD, 11/30/2011–11/30/2021.
[vii] Ibid. MSCI World Index and MSCI World High Dividend Yield Index returns with net dividends in USD, 02/12/2020–03/23/2020.vii. Ibid. MSCI World Index and MSCI World High Dividend Yield Index returns with net dividends in USD, 02/12/2020–03/23/2020.
[viii] Ibid. MSCI World Index and MSCI World High Dividend Yield Index returns with net dividends in USD, 10/31/2007–03/09/2009.