Income investing: Spotlight on dividends

The universe of dividend-yielding stocks is not monolithic. Choices abound, and one dividing line between such stocks is their approach to dividend policy: Do they increase dividend distributions regularly? Rarely? Not at all? We believe today’s macro environment, which is on the verge of an interest rate tightening cycle, favors investors who chose dividend growers over the often-prized high yielders.

Outperforming after rates tighten

Historically, looking at periods that follow the beginning of a rate-tightening cycle, stocks of companies that grow their dividends have outpaced those that offer the highest yields. The chart shows the ratio of prices for dividend growers to high yielders before and after the onset of a tightening cycle (calculated as the average of the past six cycles, beginning in January 1973).

Data: Ned Davis Research (

Confidence when needed most

Confidence when needed most

During times of weaker-than-expected economic growth, dividend growers have at times outperformed high yielding stocks. We believe this is due in part to the level of confidence that company managements convey when they increase dividend payouts.

It follows that when macroeconomic data come in weaker than expected, strong dividend growers can sometimes show more resilience than high yielders. Such has been the case historically.

As with many market phenomena, the relationship is not perfectly correlated, but historical data show higher growers outperforming during negative economic surprises with notable reliability. Consider the period between January 2003 and June 2015. During this span, the Citigroup Economic Surprise Index was in negative territory approximately 45% of the time. Overall, during these negative stretches, the ratio of dividend growers to high yielders advanced by more than 5% on an annualized basis.

Data: Ned Davis Research (

The Citigroup Economic Surprise Index is a rolling measure of beats and misses of indicators relative to consensus expectations.

High-yielding stocks face stretched valuations

High yielding stocks face stretched valuations

In 2015, dividend growers are facing a unique set of circumstances. Within the dividend universe, the highest yielders are hitting the most stretched valuations. U.S. equities have reached a point where they have posted double-digit returns in five of the last six years, and higher yielding stocks have led other dividend groups (including the highest dividend growers). A look at the median price-to-earnings ratio (P/E) for the highest dividend growers minus the median P/E for the highest dividend yielders (see next slide) helps explain just how expensive high yielders have become.

A pullback brewing?

A pullback brewing?

As risk-aware investors, we are concerned with these levels of valuation, because the vigorous rotation into the highest yielders could set the stage for a pullback.

Data: Ned Davis Research (

Dividend growth brings total return potential

Dividend growth brings total return potential

Investors who primarily seek income may also be well served by the capital appreciation that is generated by dividend-growing equities. This may be particularly applicable to some investors who are planning for (or already in) retirement and willing to accept a degree of equity risk. As their nest eggs are drawn down through distributions (and indirectly via the effects of inflation), capital appreciation may help replenish their portfolios at a faster rate than bond income on its own.

Dividend growth matters

Dividend growth matters

The chart shows long-term annualized total returns for stocks issued by dividend growers versus companies with static dividend policies (or no dividend policies at all).

Data: Ned Davis Research (

Portfolio-level implications

Portfolio-level implications

For each of these reasons, we maintain our bias toward companies that have historically grown their dividends or those that we believe are in a position to do so. Looking outward currently, Delaware Dividend Income FundDelaware Dividend Income FundDelaware Dividend Income Fund features several other macro-level preferences in its positioning, including:

  • An emphasis on U.S. equities (including a relatively high allocation to large-cap value stocks) while de-emphasizing international developed and emerging markets
  • A bearish stance on commodity-related investments, which have been disproportionately affected by slowing growth in China
  • A preference for companies that we believe to be undervalued, have strong cash flows, maintain manageable debt levels, operate diversified businesses, and have a history of delivering consistent dividends.
Important disclosures and definitions

Important disclosures and definitions

In slide 1, dividend growers are defined as the companies in the S&P 500 Index that are within the top 25% of payers based on the year-over-year change in their indicated dividend rates. High dividend yielders are defined as the companies in the S&P 500 Index that are within the top 25% dividend payers based on their indicated dividend yields.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.

The P/E ratio is a valuation measure that compares a company's current share price to its per-share earnings.

Launch slideshow

Charts are for illustrative purposes only.

The views expressed represent the Manager's assessment of the market environment as of July 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

International investments entail risks not ordinarily associated with US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.


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