Dividend Investing Is Dead!

Seeking Alpha has an article up noting the struggles this year of the Schwab US Dividend Equity ETF (SCHD). The article was more about an option strategy involving the fund, not so much a look at the fund itself. The chart captures the YTD performance of several of the larger dividend ETFs that focus on domestic equities. 

They are all getting left far behind up to this point. That's quite a pivot from last year where many of the dividend funds were miles ahead of the S&P 500.

This echoes a point from the last blog post when we looked at return stacking with a big allocation to managed futures. Dividend investing is absolutely a valid strategy but no single strategy can always outperform. A valid strategy will at times lead market cap weighting and at other times lag market cap weighting.

The word factor has come into vogue in recent years for things like momentum, low volatility, buybacks, even growth and value could be thought of as factors. I'd say simple market cap weighting (MCW) is also a factor. Last year MCW lagged, this year it is dividends that are lagging. We could look at other factors and I bet some would have lagged this year and outperformed this year and so on because that is the nature of it. 

I was recently shown a model ETF portfolio where all of the equity funds were dividend centric. This is a very concentrated bet on one factor. and according to Portfolio Visualizer, that factor has lagged MCW in nine out of the last 12 years including a partial for 2023. 

That does not invalidate dividend investing, it just makes the point that it is not a panacea. Nothing is. The partial year performance dispersion this year is the biggest gap in SCHD's history, coming on the heels of the biggest performance dispersion going the other way last year. Does that make 2023 a reversion to the mean? I don't know and I don't want to be in the position of having to try to figure that out after making a lopsided bet on a single factor,

An investor not thinking about factors and just wanting to capture market beta going all in on MCW makes sense to me. MCW funds have been around long enough to set reasonable expectations about what the ride might be like. I'm not sure we can say the same about new factor funds that have maybe only been through one cycle. 

A couple of the dividend ETFs have been around for two cycles, last year's bear market and the Financial Crisis. As well as the dividend funds did last year, during the Financial Crisis they didn't do well at all. The chart shows SPDR S&P Dividend ETF (SDY) falling in lockstep with the S&P 500 and iShares US Select Dividend ETF (DVY) doing noticeably worse.

When the next bear market comes, will dividend funds outperform or lag? There is no way to know. Same with any other factor, there is no way to know. Anyone looking to pursue a factor based strategy is probably better off blending together different factors. The right blend might yield market beating results but just as good might be a combo with market equaling results achieved with lower, overall volatility. That would be of more interest to me.

This is not easy work, it requires time spent studying and understanding cyclical tendencies. What part of the cycle might equalweight or high beta or any of the others lead or lag and then you need to understand the why behind those tendencies. And even once you do have that figured out, there is nothing that says a factor must follow its normal tendency in every cycle.