MARKETVIEW
TheAppealofDividend-GrowthStocks
June20,2016
2517Views
Investorsbracingforhighvolatilitymaywanttoconsiderhigh-quality,
dividend-growthstockswhich,likeballastinaboat,mayofferthepotentialfor
portfoliostability.
Sincetheendof theU.S.FederalReserve’s(Fed)quantitativeeasing(QE)programinOctober
2014,thestockmarket(asrepresentedbytheS&P500® Index)hasbecomemorevolatileandhas
hadanincreasinglydif f iculttimeholdingontoitsgains.Dividend-payingstocks,ontheotherhand,
havebeenonaroll.
Dividendstocksdidn’tgarnermuchattentionduringtheeraof QE(2009–14).Asstockprices
movedsignif icantlyhigherinaragingQE-drivenbullmarket,dividendsaccountedf orarelatively
smallportionof stockreturns—just20%of theS&P500’stotalreturn,1comparedwiththelongtermaverageof 45%.2
Sincetheendof QE,however,dividendshaveaccountedf or70%of theS&P500’sreturns(asof
May31,2016),3providingamuch-neededsourceof currentincomef oryield-starvedinvestors.
Thisisarelativelyrarepointinhistoryduringwhichevenmoderatedividend-yieldingstockshave
higheryieldsthanU.S.Treasuriesandevenhigheryieldsthansomeinvestment-gradecorporate
bonds.Consideralsothepotentialf orgrowthamongthesedividend-yielders.Goingback70years,
f orexample,theS&P500componentcompanieshaveraisedtheirdividendsbyanaverageof
6.4%peryear.4 So,inmanycases,stockshaveahigher-yieldstartingpointthanbonds,andof f er
thepotentialf orgrowthinthisyield.It’snothard,then,toseewhyinvestorsaresointerestedin
thisspace.
Inthatregard,oneof thetrapsthatinvestorscanf allinto,however,isthetemptationtof ocusonly
onstockswiththehighestdividendyields—astrategythathasanumberof drawbacks.Itisof ten
thecasethatthesehigh-yieldingcompaniescannotsustainthedividendpayoutthroughdif f icult
periods,resultinginaf orceddividendcutdowntheline.Thistypicallyisnotapositiveindicator;
dividendgrowthcompanieshavesignif icantlyoutperf ormedthosethatcutoreliminatetheir
dividends,andthey’vedonesowithmuchlowerrisk(asmeasuredbystandarddeviation).
Chart1:DividendGrowersHaveOutperformedDividendCutters,andwithLowerRisk
10years,asof03/31/2016
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Source:FactSet.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any
specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture
results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect
investment.Past pe rf ormance isnoguarant e e of f ut ure re sult s.
*S&P90010-YearDividendGrowthIndex.**BasedonstocksintheS&P500Indexthathavecuttheirdividendsat
leastonceoverthetrailing12months.
Overthepastsixmonths,mediaheadlineshavef ocusedagreatdealoncompaniesannouncing
dividendcuts,acohortwhosenumbershave,indeed,increased—mostlyintheenergyandenergyrelatedsectors.Othersectorswithmorehealthyf undamentalshavecontinuedtoprovidedividend
growth.Todatethisyear(asof May31,2016),184companieshaveeitherincreaseddividendsor
initiateddividendpayouts,morethan12timesmorethanhavecutorsuspendedtheirdividends.
Webelieveinvestingincompanieswithahistoricalrecordof consistentdividendgrowthcanbea
rewardinglong-termstrategy.Thesecompaniestypicallyareblue-chipnames—thatis,market
leaderswithstablebusinessmodelsandstrongbalancesheets.Assuch,theytendtocapture
mostof themarket’supsideoverthelongterm,whilealsoperf ormingwellonarelativebasisas
volatilityincreases.Nearly75%of consistentdividendgrowersboastaqualityrankingof ‘A-‘or
higherf romStandard&Poor’s—arankingthatisbasedonthelong-termgrowthandstabilityof a
company’searningsanddividends—comparedwithonly42%intheS&P500.
And,asshowninChart2,high-qualitystockshistoricallyhaveoutperf ormedlower-qualitystocks
duringperiodsof highmarketvolatility—exactlywhatwe’veseeninthepost–QEera.
Chart2:Dividend-GrowerStocksOutperformedWhenVolatilityIncreased
Dataasof04/01/1991-03/31/2016
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Source:BloombergandBankof AmericaMerrillLynchU.S.EquityandU.S.QuantStrategy.Correlationof Bof AML
qualityindexes’12-monthperf ormance(relativetoBof AMLcoverageuniverse)with12-monthchangesintheCBOE
VIXduring1991–2016.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any
specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture
results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect
investment.Pastperformanceisnoguaranteeoffutureresults.
Overthelongterm,thesestocksalsotendtocapturemost,if notall,of thebroadermarket’s
upsidewithlowerlevelsof volatility,asChart3illustrates.
Chart3:DividendGrowersHaveOfferedAttractiveRisk-AdjustedReturns
10years,asof03/31/2016
Source:FactSetandMorningstar,Inc.Thehistoricaldataaref orillustrativepurposesonly,donotrepresentthe
perf ormanceof anyspecif icportf oliomanagedbyLordAbbett&CoLLCAbbettoranyparticularinvestment,andare
notintendedtopredictordepictf utureresults.Indexesareunmanaged,donotref lectthedeductionof f eesor
expenses,andarenotavailablef ordirectinvestment.Pastperformanceisnoguaranteeoffutureresults.
*
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*S&P90010-yearDividendGrowthIndex.**MorningstarLargeBlendCategory.
Inconclusion,investorsbracingf orhighvolatilitymaywanttoconsiderhigh-quality,dividendgrowthstocks.
1Morningstar,Inc.
2 StrategasResearchPartners.
3Morningstar,Inc.
4 StrategasResearchPartners.
IMPORTANTINFORMATION
Dividendyieldisequaltothedividenddividedbythestockprice.Dividendyieldisonemeasureof astock'svalue.A
highdividendyieldmayindicatethatastockisrelativelyinexpensive.
Standarddeviationisameasureofameasureofvolatility.Itindicatesthevariabilityofan
investment'sreturns.
Dividendpolicy:Eachstock’sdividendpolicyisdeterminedonarolling12-monthbasis.Forexample,astockis
classif iedasdividend-payingif itpaidacashdividendatanytimeduringtheprevious12monthsandnon-dividend
payingif itdidnotpayacashdividendatanytimeduringtheprevious12months.DividendGrowersandinitiators
includestocksthatraisedtheirexistingdividendorinitiatedanewdividendduringthepreceding12months.Dividend
cuttersoreliminatorsincludestocksthatloweredtheirexistingdividendorstoppedpayingregulardividendsduring
thepreceding12months.Astockisreclassif iedonlyif itsdividendpolicieschange.
Dividendsarenotguaranteedandmaybeincreased,decreased,orsuspendedaltogetheratthediscretionof the
issuingcompany.
DividendGrowers,Payers,andNon-Payersaresubcomponentsof theS&P500 © Index.Thecategoriesarecreated
usingactualannualdividendstoidentif ydividend-payingstocksandarerebalancedannually.Thedividendpolicyf or
eachstockisdeterminedonarolling12-monthbasis.
S&PQualityRankingsSystemattemptstoref lectthelong-termgrowthandstabilityof acompany’searningsand
dividends.Therankingsaregeneratedusingacomputerizedsystembasedonacompany’sper-shareearningsand
dividendsrecordacrossthemostrecent10years.Thesystemf ocusesonearningsanddividendperf ormance,and
doesnotref lectallof thef actorsthatmaybearonthequalityof acompany.Basicscoresarecomputedf orearnings
anddividends,andthenadjustedbyasetof predeterminedmodif iersf orchangesintherateof growth,stabilityover
longperiods,andcyclicality.Adjustedscoresarethencombinedtoproduceaf inalranking.TheQualityRankingScale
isasf ollows:A+Highest,AHigh,A-AboveAverage,B+Average,BBelowAverage,B-Lower,CLowest,DIn
Reorganization,LIQLiquidation.Copyright © 2016Standard&Poor'sFinancialServicesLLC,apartof McGraw-Hill
Financial.
TheCBOE(ChicagoBoardofExchange)VolatilityIndex© (VIX© )isakeymeasureof marketexpectationsof neartermvolatilityconveyedbyS&P500stockindexoptionprices.Sinceitsintroductionin1993,VIXhasbeenconsidered
bymanytobetheworld’spremierbarometerof investorsentimentandmarketvolatility(www.cboe.com)
S&P900 © 10-YearDividendGrowthIndexisasubsetof theS&P900Index.Theindexconsistsof largeandmidsizedcompaniesthathavea10-yearhistoryof dividendissuanceandgrowth,andthatmeetcertainothercriteria.
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TheDividendGrowthIndexrepresentsaconsiderablynarrowerinvestableuniversethantheS&P900Indexbecause
of thesestringentcriteria.TheDividendGrowthIndexisacustomindexthatwasdevelopedattherequestof Lord
Abbett.TheDividendGrowthIndexistheexclusivepropertyof Standard&Poor'sFinancialServicesLLC.Undera
contractwithLordAbbett,Standard&Poor’sadministers,maintains,andcalculatestheDividendGrowthIndex.
Standard&Poor'sanditsaf f iliatesshallhavenoliabilityf oranyerrorsoromissionsincalculatingtheIndex.
TheS&P500 © Indexiswidelyregardedasthestandardf ormeasuringlargecapU.S.stockmarketperf ormanceand
includesarepresentativesampleof leadingcompaniesinleadingindustries.
Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirectinvestment.
TreasuriesaredebtsecuritiesissuedbytheU.S.governmentandsecuredbyitsf ullf aithandcredit.Incomef rom
Treasurysecuritiesisexemptf romstateandlocaltaxes.
ANoteaboutRisk:Thevalueof investmentsinequitysecuritieswillf luctuateinresponsetogeneraleconomic
conditionsandtochangesintheprospectsof particularcompaniesand/orsectorsintheeconomy.Whilegrowth
stocksaresubjecttothedailyupsanddownsof thestockmarket,theirlong-termpotentialaswellastheirvolatility
canbesubstantial.Valueinvestinginvolvestheriskthatthemarketmaynotrecognizethatsecuritiesareundervalued,
andtheymaynotappreciateasanticipated.Smallercompaniestendtobemorevolatileandlessliquidthanlarger
companies.Smallcapcompaniesmayalsohavemorelimitedproductlines,markets,orf inancialresourcesand
typicallyexperienceahigherriskof f ailurethanlargecapcompanies.Thevalueof aninvestmentinf ixed-income
securitieswillchangeasinterestratesf luctuateandinresponsetomarketmovements.Asinterestratesf all,the
pricesof debtsecuritiestendtorise.Asratesrise,pricestendtof all.
Noinvestingstrategycanovercomeallmarketvolatilityorguaranteef utureresults.
TheopinionsinMarketViewareasof thedateof publication,aresubjecttochangebasedonsubsequent
developments,andmaynotref lecttheviewsof thef irmasawhole.Thematerialisnotintendedtoberelieduponas
af orecast,research,orinvestmentadvice,isnotarecommendationorof f ertobuyorsellanysecuritiesortoadopt
anyinvestmentstrategy,andisnotintendedtopredictordepicttheperf ormanceof anyinvestment.Readersshould
notassumethatinvestmentsincompanies,securities,sectors,and/ormarketsdescribedwereorwillbeprof itable.
Investinginvolvesrisk,includingpossiblelossof principal.Thisdocumentispreparedbasedontheinf ormationLord
Abbettdeemsreliable;however,LordAbbettdoesnotwarranttheaccuracyandcompletenessof theinf ormation.
Investorsshouldconsultwithaf inancialadvisorpriortomakinganinvestmentdecision.
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Theinformationprovidedisnotdirectedatanyinvestororcategoryofinvestorsandis
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