As 2023 draws to a close, dividend stocks have underperformed, but the end of interest rate hikes and growing recession fears are making them noteworthy again. Long-term, reinvested dividends accounted for as much as 58% of average stock market returns over the past 20 years, offering good inflation protection.
This year, dividend stocks have been big losers in the capital market, with the iShares Core High Dividend ETF (HDV) underperforming the SPDR S&P 500 ETF by over 20 points (-5% vs. +16%). The high interest rates set by the FED, at 5.5%, created strong competition from other assets offering attractive risk-free returns. This has led to an inflow of 1 trillion dollars into U.S. money market funds this year. With global central banks nearing the peak of interest rate hike cycles and rate cuts on the horizon, it seems timely to return to dividend stocks. In Poland, there have already been two rate cuts totaling 1 pp., although the RPP did not opt for another rate cut in November. Simultaneously, the specter of economic slowdown is circling globally, potentially increasing interest in more defensive investment strategies.
Last year, global public companies paid shareholders dividends worth 1.6 trillion dollars, an 8% increase from the previous year. The largest payouts came from banks (27%) and the consumer products sector (17%). Nestle, HSBC, and Mercedes remain the top dividend payers.
Historically, dividends have been an excellent long-term inflation hedge. Over the past 20 years, consumer prices in the USA and the UK have risen by 63%, while dividend-paying companies from the S&P 500 increased their payouts by an average of 84%.
Reinvested dividends constitute as much as 48% of long-term returns from global stock markets. Global stocks increased by 170% over the past 20 years, but with reinvested dividends, the increase is as much as 320%. For major markets, the average is even higher at 58%. In the American market, the level is lower at 47% in the S&P 500, partly because buying back own shares is a popular alternative to paying dividends. U.S. tech companies typically reinvest their profits rather than pay dividends – for NASDAQ, the average is only 15%.
Paweł Majtkowski, an analyst at eToro
