In the decade following the Global Financial Crisis, global fixed income yields have remained low by historical standards —and many investors have turned to dividend growth stocks for their combination of yield and capital appreciation potential. At Invesco Unit Trusts, we don’t see this trend abating anytime soon. In fact, we believe the current environment may be especially well-suited to investing in dividend growth strategies, due to four macro factors described below.

A history of higher returns and lower volatility

Before we discuss today’s environment, what’s the appeal of dividend growth stocks in general? Companies that are growing their dividends tend to be associated with advantageous business models, strong fundamentals, and good stewardship of shareholder capital. While these stocks can be eclipsed by non-dividend-paying momentum stocks in the short term, they have proven to be an effective strategy to generate attractive returns with lower volatility in the long term (Figures 1 and 2).

Figure 1: Dividend growth stocks have a history of higher returns
Growth of $100 invested in the S&P 500 Index and the S&P 500 Dividend Aristocrats Index, with and without reinvesting dividends, over the past 10 years (6/30/2009 – 6/30/2019).

Source: Bloomberg, L.P. A total return index assumes that dividends are reinvested back into the index. Past performance does not guarantee future results. An investment cannot be made directly into an index.

Figure 2: Dividend growth stocks have a history of lower volatility
Historical 260-day annualized volatility of the S&P 500 Index and the S&P 500 Dividend Aristocrats Index, over the past five years (6/30/2014 – 6/30/2019).

Source: Bloomberg, L.P. The 260-day price volatility equals the annualized standard deviation of the relative price change for the 260 most recent trading days closing price, expressed as a percentage. Past performance does not guarantee future results. An investment cannot be made directly into an index.

Four macro factors supporting dividend growth investing

Macro factor 1: Lower expected equity market capital returns. From the market low on March 6, 2009, through June 30, 2019, the S&P 500 Index has returned over 17% annually, inclusive of dividend reinvestment.1 While bull markets don’t die of old age, we believe that historical market returns and current market valuations suggest that it’s unlikely the S&P 500 Index will repeat its stellar performance over the next decade.

  • Why does this matter to dividend growth investors? In a world of lower expected equity market capital returns, the importance of reliable and growing dividends increases. By way of hypothetical example, a 2% to 3% dividend yield has a much bigger impact on total return when performance is 7% versus 17%. Moreover, under a scenario of limited capital appreciation, dividend growth may help bolster long-term total return by potentially driving higher future dividend yields.