2018 ended on a sour note for the S&P 500®, as the index declined by more than 9% in December alone. The drop-off resulted in the first negative calendar year return (-4.38%) for the S&P 500 (TR) since the financial crisis (2008). Meanwhile, the S&P 500 Dividend Aristocrats®, which is designed to measure the performance of S&P 500 companies that have increased their dividends for the last 25 consecutive years, fared relatively better in 2018 but still ended in the red (-2.73%). The S&P 500 Dividend Aristocrat’s outperformance of the benchmark led us to explore the downside protection characteristics of dividend growth strategies relative to the broad equity market. In addition, we attempt to answer the question of whether outperformance in a down year is typical for dividend growth strategies, or if 2018 was an anomaly.
Since year-end 1989, there have been six calendar years of negative performance for the S&P 500—and in all six years, the S&P 500 Dividend Aristocrats outperformed the equity benchmark by an average of 13.28%. In fact, the S&P 500 Dividend Aristocrats produced a positive total return in three of those years (see Exhibit 1).
To see how the S&P 500 Dividend Aristocrats stacks up against the S&P 500 in shorter periods, we next look at historical monthly returns. First, we classify all months into up and down months based on the S&P 500’s returns. We then compute the monthly hit rates (batting average) and average excess returns of the S&P 500 Dividend Aristocrats compared to the S&P 500.
The S&P 500 Dividend Aristocrats outperformed the S&P 500 53% of the time, by an average of 0.16%. When isolated to down markets, the S&P 500 Dividend Aristocrats outperformed over 70% of the time and by an average of 1.13%. In up markets, the S&P 500 Dividend Aristocrats underperformed 56% of the time, but at a lower average magnitude (-0.34%). This shows that the S&P 500 Dividend Aristocrats has delivered downside protection in months when the S&P 500 lost ground.
Stemming from the results in Exhibit 2, our final question is: does the magnitude of return influence return differentials? To answer this question, we broke out the historical monthly returns of the S&P 500 from -10% to 10% in 1% increments. We then computed hit rates (light blue diamonds, primary axis) and average excess returns (navy columns, secondary axis) for each group in Exhibit 3.
We are able to confirm that the lower the return of the S&P 500, the better the relative performance was for the S&P 500 Dividend Aristocrats. We see the batting average was typically better for the more negative months than the less negative months. Additionally, we observe that the average excess return over the S&P 500 was higher in the most negative months. Since 1989, the S&P 500 has lost 5% or more in 31 out of 348 months (~9% of the time). In these months, the average excess return for the S&P 500 Dividend Aristocrats was 2.46%, with a hit rate of 81%. The median excess return was of similar magnitude (2.32%); therefore, the results were not skewed by only a few months—rather, there was consistent outperformance.
Based on the results, we have demonstrated that the S&P 500 Dividend Aristocrats outperformed the S&P 500 in down markets by an average of 1.13% per month. The results were more evident when the S&P 500 lost the most, with the S&P 500 Dividend Aristocrats outperforming by an average of 2.46% when the S&P 500 lost at least 5%. The underlying reasons why the S&P 500 Dividend Aristocrats outperforms will be discussed in another post.
To learn more about dividend growth strategies, register here for an upcoming webinar on Thursday, January 10th featuring S&P DJI’s Aye Soe, CFA, Managing Director, Global Research & Design.