Performance of Dividend Indexes during Monetary Tightening

Dividend Indexes and Monetary Policy

This analysis focuses on how dividend-focused stocks perform compared with the S&P 500 during periods when the Fed is tightening and/or monetary policy is considered tight.  For dividend-focused stocks, we included in this analysis two dividend-oriented indexes—investing in dividend growth stocks and investing in high dividend yielding stocks.  As a proxy for dividend growth strategies, we look to the S&P 500 Dividend Aristocrats Index which consists of a list of companies—mainly well-known, large-cap, blue-chip companies—in the S&P 500 with a track record of increasing dividends for at least 25 consecutive years.  As a measure of the returns to a high dividend strategy we looked at the DJ Select U.S. Dividend Index a broad market index which tracks stocks with the highest dividends.  We also looked at the returns on the S&P 500 because some commentators and investors are inclined to judge the performance of dividend-focused stocks against other kinds of equities.

Measuring the Federal Reserve’s policy stance. 

Fed-watchers and the Fed itself have long debated about whether the central bank’s policy stance is easy or tight. Although the Federal Open Market Committee, the policymaking body of the Federal Reserve, has often characterized its policy as “accommodative” or as “needing additional firming” in its post-meeting statements and minutes, this description is subjective. In particular, it does not distinguish between the stance of monetary policy (easy, neutral, or tight), or whether the FOMC is easing, on hold, or tightening. The distinction between the stance and direction of change in policy, moreover, is not always clear. Sometimes the market, a hike in the Fed funds rate as the beginning of a new tightening round, will react immediately, raising interest rates across the entire term structure of bond yields. In cases such as these, the market has responded to an initial change in policy by tightening monetary conditions, possibly for months to come, without further Fed action. Some researchers have used the Fed funds rate or the discount rate as a measure of the stance of Fed policy, but policy rates, money market rates, and bond yields have been on a multi-decade downward trend, making comparisons of interest levels across years questionable.  A 5% Fed funds rate today would represent an unambiguously tight policy stance; that rate would not have seemed especially tight in mid-1997 when 10-year Treasury yields were 6.5% and GDP was growing at a 4.7% annual rate. For determining when monetary policy is tightening or tight,  we turned to a monthly measure of Fed monetary policy measured by Professor Brian Gendreau of the University of Florida Business School. 

Results

Chart 1 shows the performance since February 1992 of the dividend-focused indexes compared with the S&P during the times when monetary policy has been tightening or tight..  The average annualized return has higher for the 2 dividend-focused indexes than the S&P 500.  This has also been true for the majority of the individual periods of monetary tightening.

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Chart 1

Return of Indexes during Periods of Monetary Tightening

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Important Disclosures

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This material has been prepared and issued by Heckman Global Advisors (HGA), a division of DCM Advisors, LLC (DCM), and may not be reproduced or re-disseminated in any form. DCM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about DCM including its advisory services and fee schedule can be found in Form ADV Part 2, which is available upon request.

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This document has been prepared for informational purposes only and is not a solicitation of any offer to buy or sell any security, commodity, futures contract or instrument or related derivative (hereinafter "instrument") or to participate in any trading strategy.

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This material does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. The securities discussed in this material may not be suitable or appropriate for all investors. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks, and merits, as well as the legal, regulatory and accounting characteristics and consequences of the transaction. You should consider this material among other factors in making an investment decision. This information is not intended to be provided and may not be used by any person or entity in any jurisdiction where the provision or use thereof would be contrary to applicable laws, rules or regulations. Any securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not be offered or sold absent an exemption therefrom. 

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The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot be guaranteed. The comments contained herein are opinions and may not represent the opinions of DCM and are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable, will equal past performance or will achieve same or similar results. The country allocations recommended herein are solely those of the HGA division of DCM and may differ from those of other business units of DCM. The countries mentioned herein are covered by our proprietary top-down country allocation model and are included, together with any rankings and/or weightings, for illustrative purposes only. The representative countries and related information are subject to change at any time and are not intended as a specific recommendation for investment. Foreign securities can be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets. Certain investments may invest in derivatives, which may increase the volatility of its net asset value and may result in a loss.

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DCM-22-46

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