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AAM Viewpoints – Is There a Dividend Sweet Spot? Part Two: Large, Mid & Small-Capitalization Securities

In August I released an article titled “Is There a Dividend Sweet Spot?” The research in that article was intended 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. This article continues that expansion by incorporating small and mid-capitalization securities into the research, as well as showing the results in the previous article.

Since 2004, 38% of the S&P 500’s total return can be attributed to its dividends, 27% for the S&P 400, and 22% for the S&P 600 (12/31/2003 – 9/30/2019). On an annualized basis, that’s anywhere from an extra 2.2% to 1.3% of return each year from dividends. We believe this is something investors should consider during portfolio construction. Our research is aimed toward helping with that.

The study below divides up the S&P 500, S&P 400, and S&P 600 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 9/30/2019, then ranked highest to lowest.

total return breakdown of s&p 500 by dividend yield

Source: AAM, data from FactSet | Past performance is no guarantee of future results.

total return breakdown of s&p 400 by dividend yield

Source: AAM, data from FactSet | Past performance is no guarantee of future results.


total return breakdown of s&p 600 by dividend yield

Source: AAM, data from FactSet | Past performance is no guarantee of future results.

The Sweet Spots

In the S&P 500, the no-dividend category had the highest annualized return for the full period, although the 2-3% category followed closely behind. Looking at this on a risk-adjusted basis the story flips. The 2-3% category had 41 basis points of return for every unit of risk, while the no-dividend category had only 36 basis points.

For the S&P 400 and 600 it’s a little more straight forward, with the top categories being the same from both an annualized total return perspective as well as a risk adjusted one. In the S&P 400, which is the mid-capitalization index, the top performing category was the 4-5% yielders. The 3-4% category should also get an honorable mention, since it’s a more diversified category that averaged over 30 securities; while the 4-5% category averaged only 18. The 3-4% category was also the top category in the S&P 600 small capitalization index and had the lowest average annual standard deviation across all three indices (as shown in the tables below).


Source: AAM, data from FactSet | Past performance is no guarantee of future results.

Now it’s time to discuss the notable laggard. Over the period, the 5%-and-greater category was the worst performing and one of the most volatile categories in all three indices. This looks terrible on the surface, but a lot of this can be explained away by the lack of diversification. We believe there are great investment opportunities in the 5%-and-greater category, but in the S&P 500 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 to negative events, rather than thought out dividend policy. The most material evidence for this was in 2008, when the members of category rose 10-fold from the average. Looking at the 5% greater category in the S&P 400 and 600, the amount of companies that make up the category does increase, but to only 22 companies on average. Of those 22 companies, most of them fall into either the REIT (Real Estate Investment Trust) or Financials sector, which greatly reduces the category’s diversification.

S&P 500: Growth of Hypothetical $10,000 Across the Dividend Spectrum

Source: AAM

S&P 400: Growth of Hypothetical $10,000 Across the Dividend Spectrum

Source: AAM

S&P 600: Growth of Hypothetical $10,000 Across the Dividend Spectrum

Source: AAM | The above charts illustrate the annual income potential generated by a hypothetical investment and do not reflect the impact any price appreciation or depreciation may have on the total market value of the investment. An investment may be worth more or less than the initial principal investment at sale. Actual dividend growth rates will vary over time and may not always be positive.

The three charts above were created using the same data as the tables but show the returns in dollar terms. An investment of $10,000 dollars into the S&P 500’s 2-3% category from 12/31/2003 to 9/30/2019 would have grown into $49,728. The same investment into S&P 400’s 4-5% category would have grown into $49,695 dollars, or if invested into S&P 600 3-4% category would have grown into $48,838 dollars. Companies in these yield categories seem to be in a dividend sweet spot regarding risk-to-reward ratio within their respective indices. Investors may consider this a nice rule of thumb to use, but many opportunities can be found across the entire dividend spectrum, in our opinion.


CRN: 2019-1104-7783R

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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