The percentage of dividends as a part of personal income has steadily increased over time, making dividends an important source of income. Dividend income has climbed from 2.85% in 1981 to 5.89% in 2014, whereas interest income has declined from 13.5% to 8.6% over the same period (see Exhibit 1).
Since 1956, dividends have accounted for approximately one-third of the total equity return of the S&P 500®, with capital appreciation making up the other two-thirds. Today, most market participants know that both sustainable dividend income and the potential for capital appreciation form total return expectations. Exhibits 2 and 3 illustrate the historical importance of dividends.
INDEX DESIGN AND CONSTRUCTION
The S&P 500 High Dividend Index aims to provide exposure to the highest quintile of dividend-paying stocks in the S&P 500. The constituents of S&P 500 High Dividend Index must be members of the S&P 500 and have an indicated dividend yield as of the rebalancing reference date. The index ranks in descending order the indicated dividend yield and selects the top 80 equally weighted by 1/(n=80). The index is rebalanced semiannually in January and July.
In the large-cap U.S. equity space, we find that over the past 24 years, firms that have paid high dividends relative to their peers have outperformed the broader market (see Exhibits 5 and 6). Such outperformance comes at a slightly higher volatility over the total time period and higher drawdowns. This can be expected, as there is no filter on the quality of the dividend payments, but only on the magnitude of the payments relative to the price (dividend yield).
As could be expected, the yield of the S&P 500 High Dividend Index is on average 200-300 bps higher than the S&P 500 (see Exhibit 7).
In times when interest rates are low, investors tend to seek places where they can receive a higher yield for their investment. Exhibit 8 shows that as of Aug. 31, 2015, the S&P 500 High Dividend Index delivered the highest yield, at 4.33%. The current low interest rate environment has made dividend investing a compelling strategy. Currently, the yield on the six-month U.S. Treasury Bill is the lowest among the instruments observed. Recently, equity- and dividend-based strategies have been offering higher yields compared with many traditional fixed income options that are available to income-seeking investors. Exhibit 9 compares the current yields on the short-term fixed income instruments with equities and a portfolio of high dividend-paying securities.