Why Dividend Stocks Are Back In Fashion (And Never Go Out Of Style)

By Daniel Prince, CFA

Why Dividends Matter

Like a classic tuxedo or black cocktail dress, dividends never go out of style. Since 1926, nearly one-third of the S&P 500’s total return has come from dividends, which are cash payments companies make to their shareholders, typically on a quarterly basis.¹

Just like certain pieces of clothing, there are some “seasons” when investors rely on dividends more than others. Dividends were certainly fashionable in 2022, when S&P 500 companies paid out a record $565 billion in dividends.² In a very challenging year, investors sought the income generated by dividends and looked to companies that provided them. Dividend-paying members of the S&P 500 outperformed the index, as did some dividend-focused ETFs. The iShares Core High Dividend ETF (HDV), for example, rose 7.1% last year vs. an 18.1% decline on a total return basis for the S&P 500.³

Dividend-paying stocks outperform in 2022

Performance data represents past performance and does not guarantee future results. Investment return and principal value will fluctuate with market conditions and may be lower or higher when you sell your shares. Current performance may differ from the performance shown. For standardized performance, visit HDV’s product page. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged and one cannot invest directly in an index.

Chart description: Bar chart showing the 2022 total return performance of the iShares Core High Dividend ETF (HDV) vs. dividend-paying members of the S&P 500 vs. the S&P 500 overall and vs. non-dividend paying members of the S&P 500.

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There are several reasons why dividend-paying stocks were in demand last year and may remain in favor for the foreseeable future. Stocks may earn investor interest based on their current and future expected cash flows. When interest rates are rising, growth is slowing and geopolitical uncertainty abounds, investors tend to prefer current cash flows over future ones.

Dividends over the decades

Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Chart description: Bar chart showing the contributions dividends made to the stock market’s total return over various decades from the 1940s through 2021. The stock market is defined using the S&P Composite Index from 1926 to 1957, and using the S&P 500 since 1957.

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In similar eras such as the 1940s and 1970s, dividends contributed at least 50% of the stock market’s total return vs. 15% or less in the decades of the 1990s and 2010s.⁴ Notably, those returns assume the dividends were reinvested, meaning investors used the funds to buy additional shares of the dividend payers’ stock vs. taking the cash. Because of the power of compounding interest, time in the market vs. timing the market can matter most to long-term investing success.

Why Investors Still Need Dividends In 2023

Past performance doesn’t guarantee similar returns for the current decade. But we believe dividend-paying stocks play a key role in portfolios, especially for investors at or near retirement.

With bond yields up dramatically in the past 12 months, it may be tempting to think “Why do I need dividends?“

An answer is that bonds have downside risk too, as we saw in 2022. Dividend-paying stocks can help diversify your sources of income while providing potential upside. In 2023, investors may continue to seek companies with relatively stable and mature businesses with the ability to generate cash flow even in a more-challenging macroeconomic environment.

Rather than taking the risk of picking individual dividend-paying stocks, investors may want to consider exchange-traded funds (ETFs) which focus on dividend-paying companies. When doing so, it’s important to understand not all dividend ETFs are created equal – and that’s by design.

For example, the iShares Core High Dividend ETF (HDV) seeks to track an index of relatively high-dividend-paying U.S. equities and tends to skew toward stocks in traditional dividend-paying sectors such as energy and healthcare.

The iShares Core Dividend ETF (DIVB), on the other hand, focuses on U.S. stocks with a track record of dividend payments and/or share buybacks, another way corporations can return cash to shareholders. Currently, DIVB invests in over 400 stocks vs. 75 for HDV.⁵ The index DIVB seeks to track is designed to keep sector weights aligned with the broad market. So, while many dividend ETFs may have little exposure to traditional growth sectors, technology is currently a top sector in DIVB. And while we strive to keep fees low on all our ETFs, currently, DIVB is the lowest-cost dividend ETF in the U.S.⁶

The iShares Core Dividend Growth ETF (DGRO), meanwhile, prioritizes dividend growth over current dividend yield by seeking to track an index of high-quality companies that have a history of increasing their dividends. For example, Microsoft, a top holding in the fund, has grown its dividend for more than 15 consecutive years but has a slightly lower dividend yield than the S&P 500.⁷

All three of these ETFs can be used at the core of a portfolio, giving investors various low-cost options for seeking income.

As with any investment, it’s critical to know what you’re getting with an ETF and to understand where (and how) it fits in your overall portfolio. It’s also important, as investors learned in 2022, to stick to the fundamentals and stay diversified in all market climates. The good news is investors may have an opportunity today to find income from both bonds and dividend-paying stocks.

iShares Core Dividend ETF Comparison

Caption:Table containing comparison data for iShares Core Dividend ETFs

ETF	iShares Core High Dividend ETF (HDV)	iShares Core Dividend ETF (DIVB)	iShares Core Dividend Growth ETF (DGRO)
Key Focus	Relatively high dividend-paying U.S. equities	U.S. stocks with a track record of dividend payments and/or share buybacks	U.S. companies with a history of increasing dividends
Top Sector Holdings	Energy, Health Care	Financials, Information Technology	Information Technology, Financials
Index Dividend Yield ⁸	4.2%	3.4%	2.4%

Click to enlarge

Source: BlackRock, Morningstar.

Chart is provided for illustrative purposes.

Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Table description: Comparison table showing the primary focus and top holdings of the iShares Core High Dividend ETF (HDV), iShares Core Dividend ETF (DIVB) and iShares Core Dividend Growth ETF (DGRO), as well as the trailing 12-month dividend yield of the benchmark indexes that the three iShares ETFs are respectively designed to track.

© 2023 BlackRock, Inc. All rights reserved.

¹ Source: S&P Dow Jones Indices LLC. Data from April 1926 to June 2021. The S&P 500 did not actually have 500 stocks prior to 1957, and it was known as the S&P Composite Index.

² Source: S&P as of 12/31/2022.

³ Source: Morningstar as of 12/31/2022 using total return which assumes reinvestment of dividends.

⁴ Source: S&P Dow Jones Indices LLC. Data from April 1926 to June 2021.

⁵ Source: BlackRock as of 12/31/2022. There are 418 stocks in DIVB and 75 stocks in HDV, holdings are subject to change.

⁶ Source: BlackRock, Morningstar, as of 9/30/22. Dividend ETFs are defined as funds seeking to provide exposure to companies that pay dividends. DIVB has a lower expense ratio than any other U.S.-listed dividend ETF.

⁷ Source: Bloomberg as of 12/31/2022. Microsoft was the fourth-largest position in DGRO with a weight of 2.96%. Microsoft has increased its annual dividend every year since 2005. The trailing 12-month dividend yields for Microsoft and the S&P 500 were 1.2% and 1.6% respectively.

⁸ Source: Morningstar. Index dividend yield is the trailing 12-month dividend yield of the benchmark indexes that the three iShares ETFs are designed to track, as of 12/31/2022. The index for HDV, DIVB, and DGRO are the Morningstar Dividend Yield Focus Index, Morningstar US Dividend and Buyback Index, and Morningstar US Dividend Growth Index respectively.

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Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

There is no guarantee that dividends will be paid.

Fixed income risks include interest rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in the value of debt securities. Credit risk refers to the possibility that the debt issuer will not be able to make principal and interest payments.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

Companies in the healthcare sector may be affected by government regulations and programs, changes in the cost of medical products and services, changes in the demand for medical products and services among other factors. Healthcare companies are subject to competitive forces that may result in product obsolescence.

Technology companies may be subject to severe competition and product obsolescence.

Performance of companies in the financials sector may be adversely impacted by many factors, including, among others, government regulations, economic conditions, credit rating downgrades, changes in interest rates, and decreased liquidity in credit markets.

Buying and selling shares of ETFs may result in brokerage commissions.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products’ prospectuses.

Prepared by BlackRock Investments, LLC, member FINRA.

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This post originally appeared on the iShares Market Insights.