NEW YORK (Dow Jones) -- Dividend-paying stocks are supposed to suffer less in a market downturn, precisely because of their cash payouts. So, how are they doing in the current rough patch?
Short answer: Worse than the overall market last fall, but a whisker better so far this year.
As proxies for all dividend-paying equities, we are using a few of the dividend indexes that mushroomed after the federal tax rate was lowered on most dividend income in 2003. A recent download from IndexUniverse.com turned up 32 of them, each underlying a U.S.-listed exchange-traded fund.
Through April 11, the Dow Jones Wilshire 5000 Index was down 14.05% on a total return basis from its record high on Oct. 9, 2007, and is off 8.67% this year alone. By contrast, the Dow Jones Select Dividend Index fell 17.02% and 8.58% in those two periods.
It wasn't that way during the previous big skid. While the DJ Wilshire 5000 was sinking 48.61% from a peak on March 24, 2000, to its nadir on Oct. 9, 2002, the DJ Select Dividend Index (on a back-tested basis because it was launched Nov. 3, 2003) gained 19.11%.
The difference is that the earlier bear market was basically a tech and telecom belly flop, and those companies tend to pay small dividends, if any. Tech and telecom got hammered this time around, too; but it was the swoon of credit-crunched financial stocks that hit the dividend indexes particularly hard.
Banks, insurers and other financial firms tend to pay plump dividends. The yield on the Dow Jones Wilshire Financials Index was 3.24% last Dec. 31, compared to 1.83% for the DJ Wilshire 5000. That yield for Financials was the second highest among all 10 industry groups. (Telecommunications was the highest with a yield of 3.40% and Utilities was 2.86%.) Of course, the more share prices are beaten down, the higher the yield climbs, assuming the dividends are maintained and not cut.
Yield signs
The DJ Select Dividend Index, which underlies the iShares fund of the same name (DVY) is very heavily (50.1%) into Financials, which is its largest industry group. This index is weighted not by market value of the stocks but rather by their annual cash payouts as a percentage of the total disbursement of all 100 components -- another factor contributing to Financials' weight.
Other dividend indexes are in similar if not as extreme circumstances. Financials constitute 38% of the Standard & Poor's High Yield Dividend Aristocrats index, which has 50 stocks and underlies the SPDR S&P Dividend ETF (AMEX:SDY) ( SDY), and 43.7% of the Wisdom Tree Dividend Top 100 Index, which underlies the Wisdom Tree ETF of the same name (DTN).
Some dividend indexes force diversification away from Financials, but this benefit isn't free.
