Posted on 10/22/2012
Earlier this year, there was an article from Dow Jones' MarketWatch titled, "10 money-making investment ideas for 2012," which shared a sentiment popular among nearly every strategist on Wall Street at the time - "Stick with dividend-paying growth stocks". Their premise, similar to many, and plausible to even more, was that "U.S. corporate balance sheets — the fundamentals — are in excellent shape overall. Still, in a slow-growth climate the advantage goes to the best of the best. These companies tend to be in areas that are less economically sensitive. Typically they’re large-caps, with a 'wide moat' of business, strong cash flow and a history of using capital for productive purposes including acquisitions, share buybacks and consistently higher dividends." Dividend stocks were about the safest and easiest recommendation an advisor could make to clients early in 2012 as firms generally supported the concept and investors were at least more receptive to this segment of the market after seeing the S&P 500 Index [SPX] finish 2011 with 0% returns.
To this point in the year there are far worse places an investor could have been, as dividend-based products have generally produced solid absolute returns. However, despite a growing stable of dividend-based ETFs gathering assets much faster than the rest of the ETF world, the current list of 32 dividend-based ETFs have underperformed the S&P 500 Index [SPX] in ubiquitous fashion so far this year. This is illustrated in the graphic below, which segregates US Equity-based Dividend Funds from Int'l/Global Equity-based Dividend Funds. The latter are perhaps better compared to the MSCI EAFE Index [EFA] or some combination of that and SPX, but regardless the point is quite clear that as an investment genre dividend-based ETFs haven't kept pace with the broader market this year.