Financial Industry Insights from Advisors Asset Management


AAM Viewpoints – Is There a Dividend Sweet Spot?

Since 2004 dividends have made up about one-third of the S&P 500’s total return (12/31/2003 – 7/15/2019). On an annualized basis, that’s an extra 2.21% each year from dividends; not something we believe investors should overlook when considering portfolio construction. The purpose of our research was to help investors in their pursuit of dividend-paying equities; this was done by expanding on the binary system of non-payers versus dividend payers, to one more representative of the investable dividend spectrum.

The study divided up the S&P 500 into seven different categories based on dividend yield:

  1. No dividend

  2. 0-1%

  3. 1-2%

  4. 2-3%

  5. 3-4%

  6. 4-5%

  7. 5% or greater

Each category was rebalanced after close of business on the final trading day of each year. Performance was run for each category starting on 12/31/2003 and ending on 7/15/2019, then ranked highest to lowest.


Source: AAM, FactSet data | Past performance is not indicative of future results.

As you can see, no single dividend yield category outperforms in all markets, but the no-dividend category sure is trying. Annualizing each category’s total return for the full period, we see the no-dividend category coming out on top, followed closely by the 2-3% category. If we then look at the results on a risk-adjusted basis the story changes. The 2-3% category and no-dividend category come out about in line with one another, but the 2-3% category is slightly ahead with 0.35% of return for every unit of risk.


Source: AAM, FactSet data | Past performance is not indicative of future results.

Now to discuss the laggards. For the period, companies with dividend yields between 0-1% and 5% or greater were some of the most volatile and worst performing in the S&P 500. The underperformance of the 5% and greater category can be easily explained away by its lack of diversification. We believe there are great investment opportunities in the 5% and greater category, but there are not many companies that make up the category. It averaged about 14 each year, leaving the category more susceptible to low quality firms that temporarily enter the category due negative events rather than thought out dividend policy. The most material evidence for this was in 2008, when the members of the category rose 10-fold from the average. As for the 0-1% dividend yield category, the most we can say is that it was affected by its sector exposures, particularly high exposure to the financial and energy sectors, anything beyond that is conjecture.


Source: AAM, FactSet data | Past performance is not indicative of future results.

The chart above uses the same data as the first table but puts the returns in dollar terms. The no-dividend category grew a $10,000 investment in 12/31/2003 into $58,000 by 7/15/2019, while the 2-3% category grew to $49,379. The main difference is the 2-3% category experienced much less volatility over the period than the no-dividend category. It seems companies with a dividend yield of 2-3% are in a sweet spot in regard to risk-to-reward ratio. Investors may consider this a nice rule of thumb to use, but we believe many opportunities can be found across the entire dividend spectrum.

CRN: 2019-0801-7588R  

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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