The U.S. stock market has experienced a decade-long bull market since the global financial crisis. In fact, from March 9, 2009, to Sept. 6, 2019, the S&P 500® delivered a strong gain of 448% on a total return basis.
For market participants who fear an economic slowdown and a stock market pullback, the S&P 500 Quality High Dividend Index, a dividend strategy that incorporates a quality factor,[i] may aid in providing defensive characteristics.
Focusing on quality and dividend yield, the S&P 500 Quality High Dividend Index has delivered significant outperformance over the long term relative to the broader market. In nearly 25 years of history, the strategy produced an annualized return of 13.26%, compared with 9.89% from the overall U.S. equity market as indicated by the S&P 500 (see Exhibit 1). Taking volatility into consideration, the S&P 500 Quality High Dividend Index offered a risk-adjusted return of 0.94, which is 38% higher than that of the S&P 500.
Besides the superior long-term returns, the S&P 500 Quality High Dividend Index has sustained a consistently higher dividend yield. On average, the strategy offered a 2.9% dividend yield compared with its benchmark’s 2% during the 15-year horizon (see Exhibit 2).
Since its inception, the S&P 500 Quality High Dividend Index has demonstrated defensive characteristics by outperforming in down markets. Using monthly return data, we calculated upside and downside capture ratios to measure how the S&P 500 Quality High Dividend Index performed during up and down markets. The strategy’s 73.2% downside capture ratio indicates that if the broader market declines 10%, the S&P 500 Quality Dividend Index would fall 7.3%, or 27% less than the benchmark. On the other hand, the strategy captured 93.8% gains of the upside markets historically, indicating nearly full engagement in rising markets.
Exhibit 3 shows how the S&P 500 Quality High Dividend Index performed during the five most severe drawdown periods. The strategy topped its benchmark during all the turbulent periods and returned an average excess gain of 13.1%. The most noticeable performance occurred when the dotcom era ended on Sept. 1, 2002. While the S&P 500 tumbled more than 47% from its peak, the S&P 500 Quality High Dividend Index stayed in positive return territory and delivered 51.4% excess return over the benchmark.
Furthermore, when the broad market rebounded to its previous peaks, the strategy delivered higher returns during the same time horizons, as shown in Exhibit 4.
Through the combination of quality and high dividend yield, the S&P 500 Quality High Dividend Index captured the majority of the uptrend in markets but incurred less loss in down markets.
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