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.
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.
Return of Indexes during Periods of Monetary Tightening