How Often Do Dividend Stocks in the S&P 500 Outperform the Index?
Dividend stocks have long been a favored choice for investors seeking steady income and potential stability, particularly within the S&P 500, a benchmark index of 500 leading U.S. companies.
With approximately 80% of S&P 500 companies paying dividends as of today, the question of how often these stocks outperform the broader index is crucial for balancing income, growth, and risk.
This analysis delves into historical data, performance trends, and key characteristics to provide a comprehensive understanding of their outperformance frequency.
The Role of Dividends in the S&P 500
The S&P 500 is a market-cap-weighted index tracking large U.S. stocks, and its total return has historically included significant contributions from dividends.
Research indicates that dividends accounted for roughly 40% of the S&P 500’s total return from 1930 to 2021, with even higher contributions—up to 65% and 71%—during the inflationary 1940s and 1970s, respectively.
Dividend-paying stocks are often mature, financially stable companies like Procter & Gamble and Johnson & Johnson, many of which are part of the S&P 500 Dividend Aristocrats—firms with 25+ years of consecutive dividend increases.
Companies that are not paying dividends are companies that are often more speculative, typically start-ups or growth companies. An “outlier” is Berkshire Hathaway, which has continually reinvested its profits (at high incremental returns on capital).
Historical Performance: Dividend Stocks vs. the S&P 500
To assess how often dividend stocks outperform, we turn to long-term studies. A key analysis by Wellington Management, cited by Hartford Funds, examined dividend-paying stocks in the S&P 500 from 1930 to 2024, dividing them into quintiles by dividend yield and comparing performance over nine decades.
The results, summarized in the following table, highlight the frequency of outperformance:
| Quintile | Outperformed S&P 500 (%) |
|---|---|
| 1st (Highest) | 60% |
| 2nd | 70% |
| 3rd | 60% |
| 4th | Less than 2nd/3rd (not specified) |
| 5th (Lowest) | Less than 2nd/3rd (not specified) |
Notably, the 2nd-quintile stocks outperformed most often, in seven out of ten time periods, suggesting that moderately high-yielding dividend stocks have been the most consistently outperforming.
This aligns with findings that dividends have contributed significantly during high-inflation periods, such as the 1970s and 1980s, where they produced 54% of total returns during decades with 5%+ inflation
Subset Analysis: Performance of Dividend Aristocrats
A subset of dividend stocks, the S&P 500 Dividend Aristocrats, offers additional insights. These are companies with at least 25 consecutive years of dividend growth, often seen as high-quality, blue-chip firms. According to ProShares, these Aristocrats have outperformed the S&P 500 during eight of the ten worst quarterly drawdowns since 2005.
From May 2005 to March 2023, a $10,000 investment in Dividend Aristocrats grew to over $61,000, compared to $50,000 for the S&P 500, with lower volatility (standard deviation of 15.2% vs. 16.5%). This indicates not only outperformance during downturns but also better risk-adjusted returns over time.
Recent Trends and Exceptions
While historical data suggests frequent outperformance, recent trends show variability.
For instance, a Seeking Alpha article comparing the S&P 500 to dividend stock funds for the five-year period ending July 31, 2022, found that the S&P 500 had the best overall performance, followed by Dividend Growth funds, then Dividend Growth and Income funds, and finally Dividend Income funds.
This suggests that in certain market conditions, particularly when growth stocks lead, the S&P 500 can outperform dividend-focused strategies, highlighting the importance of timing and economic context.
Factors Influencing Outperformance
Several factors influence whether dividend stocks outperform the S&P 500:
- Market Conditions: During high inflation or volatility, dividend stocks, especially those with stable cash flows, tend to outperform. For example, during the 1970s and 1980s, dividends were a significant buffer.
- Dividend Yield: Stocks with moderately high yields (e.g., 2nd quintile) have historically outperformed more consistently than those with the highest yields, which may carry higher risk due to potential financial strain.
- Company Quality: Dividend Aristocrats, with their long track record, tend to outperform due to financial strength and resilience, as seen in their performance during market drawdowns.
- Economic Environment: In booming economies, growth stocks may lead, causing the S&P 500 to outperform, while during recessions or stagnant periods, dividend stocks often provide a cushion, as noted in comparisons with Dividend ETF.
Conclusion
In summary, dividend stocks in the S&P 500 often outperform the index, with research suggesting that moderately high-yielding stocks (2nd quintile) do so 70% of the time, and highest-yielding stocks 60%.
Subset analyses, such as Dividend Aristocrats, further support outperformance, especially during market downturns, with eight out of ten worst quarterly drawdowns since 2005 showing better results.
However, there are exceptions, like the five-year period ending July 2022, where the S&P 500 outperformed dividend strategies.