Why dividend stocks are back in fashion (and never go out of style)

• Since 1926, nearly one-third of the S&P 500’s total return has come from dividends, and over 50% in decades featuring rising interest rates, slowing growth and geopolitical uncertainty.
• Bond yields have risen but dividend-paying stocks can help diversify your sources of income, while providing potential upside. As in 2022, investors may continue to reward companies with the characteristics associated with dividend payers.
• The iShares Core High Dividend ETF (HDV), iShares Core Dividend ETF (DIVB) and iShares Core Dividend Growth ETF (DGRO) can be used at the core of a portfolio, giving investors various low-cost options for seeking income.

Like a classic tuxedo or black cocktail dress, dividends never go out of style. Since 1926, nearly one-third of the S&P 500’s total return has come from dividends, which are cash payments companies make to their shareholders, typically on a quarterly basis.¹

Just like certain pieces of clothing, there are some “seasons” when investors rely on dividends more than others. Dividends were certainly fashionable in 2022, when S&P 500 companies paid out a record $565 billion in dividends.² In a very challenging year, investors sought the income generated by dividends and looked to companies who provided them. Dividend-paying members of the S&P 500 outperformed the index, as did some dividend-focused ETFs. The iShares Core High Dividend ETF (HDV), for example, rose 7.1% last year vs. an 18.1% decline on a total return basis for the S&P 500.³

There are several reasons why dividend-paying stocks were in demand last year and may remain in favor for the foreseeable future. Stocks may earn investor interest based on their current and future expected cashflows. When interest rates are rising, growth is slowing and geopolitical uncertainty abounds, investors tend to prefer current cash flows over future ones.

In similar eras such as the 1940s and 1970s, dividends contributed at least 50% of the stock market’s total return vs. 15% or less in the decades of the 1990s and 2010s.⁴  Notably, those returns assume the dividends were reinvested, meaning investors used the funds to buy additional shares of the dividend payers’ stock vs. taking the cash. Because of the power of compounding interest, time in the market vs. timing the market can matter most to long-term investing success.

Past performance doesn’t guarantee similar returns for the current decade. But we believe dividend-paying stocks play a key role in portfolios, especially for investors at or near retirement. 

With bond yields up dramatically in the past 12 months, it may be tempting to think “Why do I need dividends?”

An answer is that bonds have downside risk too, as we saw in 2022. Dividend-paying stocks can help diversify your sources of income, while providing potential upside. In 2023, investors may continue to seek companies with relatively stable and mature businesses with the ability to generate cashflow even in a more-challenging macroeconomic environment.

Rather than taking the risk of picking individual dividend-paying stocks, investors may want to consider exchange-traded funds (ETFs) which focus on dividend paying companies. When doing so, it’s important to understand not all dividend ETFs are created equal — and that’s by design.

For example, the iShares Core High Dividend ETF (HDV) seeks to track an index of relatively high-dividend-paying U.S. equities and tends to skew toward stocks in traditional dividend-paying sectors such as energy and healthcare. 

The iShares Core Dividend ETF (DIVB), on the other hand, focuses on U.S. stocks with a track record of dividend payments and/or share buybacks, another way corporations can return cash to shareholders. Currently, DIVB invests in over 400 stocks vs. 75 for HDV.⁵  The index DIVB seeks to track is designed to keep sector weights aligned with the broad market. So, while many dividend ETFs may have little exposure to traditional growth sectors, technology is currently a top sector in DIVB. And while we strive to keep fees low on all our ETFs, currently, DIVB is the lowest-cost dividend ETF in the U.S.⁶

The iShares Core Dividend Growth ETF (DGRO), meanwhile, prioritizes dividend growth over current dividend yield by seeking to track an index of high-quality companies that have a history of increasing their dividends. For example, Microsoft, a top holding in the fund, has grown its dividend for more than 15 consecutive years but has a slightly lower dividend yield than the S&P 500.⁷

All three of these ETFs can be used at the core of a portfolio, giving investors various low-cost options for seeking income.

As with any investment, it’s critical to know what you’re getting with an ETF and to understand where (and how) it fits in your overall portfolio. It’s also important, as investors learned in 2022, to stick to the fundamentals and stay diversified in all market climates. The good news is investors may have an opportunity today to find income from both bonds and dividend-paying stocks.

iShares Core Dividend ETF Comparison