Taming Biases in High-Dividend Equity Strategies

Income-seeking investors are accustomed to casting wide nets after years of low yields. Many choose to tap more income from their equity allocations through high-dividend stocks. But it isn’t enough to simply stretch for yield—portfolio design matters. We think a systematic approach may produce a more diversified strategy that results in more core-like equity exposure.

High-Dividend Stocks Have Been an Effective Building Block

Stocks paying higher dividends showed their mettle during a challenging 2022: the S&P 500 High Dividend Index declined only a modest –1.1% even as the S&P 500 tumbled –18.1%. Historically speaking, stocks paying the most dividends have outperformed the broader market while low or no dividend stocks have trailed (Display).

Of course, high-dividend stocks aren’t always in favor, even if they’ve outperformed over the long run. From March 2000 through September 2006, the highest 10% of dividend payers beat an equal-weighted Russell 1000 Index by 11.56%, based on annualized returns (Display). But sometimes favoring the highest dividend payers hasn’t worked: from October 2006 to February 2009, they underperformed by 22.59% while lower-dividend stocks outperformed.