Hard times have fallen on the stodgy, dividend-paying stocks that did so well on a relative basis in 2022. Seemingly anything related to artificial intelligence (AI) is now drawing the lion’s share of investor funds, and dividend-paying stocks have been left in the dust.
In fact, according to the Wall Street Journal, the relative underperformance of dividend-paying stocks vs. their nonpaying, growth stock brethren is the largest it has been in 14 years. But does this mean that the era of dividend stocks is over, or does it represent an amazing investment opportunity?
Here’s a look at both sides of the argument, along with suggestions for how you should build your portfolio based on your objectives and risk tolerance.
How Exactly Is the Market Performing in 2023?
If you’re a tech investor, you’re doing gangbusters thus far in 2023. As of the midway point of the year, the tech-laden NASDAQ Composite Index soared 31.7%, its best first-half performance in 40 years.
However, it’s important to note that these huge gains came on the back of a devastating loss of 33.1% in 2022. Other areas of the market lagged a bit. The broader S&P 500 index, for example, posted a 15.9% first-half gain, while the venerable Dow Jones Industrial Average, laden with blue-chip, dividend-paying stocks, logged a gain of just 3.8%.
Why Are Dividend-Paying Stocks Being Left Behind?
Part of the reason that dividend-paying stocks are out of favor in 2023 is that they are generally more defensive in nature. This is why they outperformed growth stocks in 2022, a year in which the S&P 500 fell by 18.11% (including reinvested dividends).
In 2023, though, investors have been picking up bargains left in the dust in 2022 and pushing them to stratospheric levels. This is particularly true of stocks contributing to the development of AI such as Nvidia and Meta, which soared 190% and 138% respectively in the first half of 2023 alone. In this type of market environment, slow-growing, “boring” dividend stocks generally get left behind.
How Have the Two Strategies Performed Over the Long Run?
Dividends can contribute mightily to the long-term performance of both individual stocks and market indices as a whole. In fact, according to Forbes Advisor, dividends have contributed about 40% of the S&P 500’s total return over the last century, with dividend-paying stocks historically outperforming stocks that don’t pay dividends.
Using the S&P 500 as an imperfect proxy for dividend-paying stocks shows that the growth-oriented NASDAQ Composite Index has underperformed over the past 52 years, generating a total return of 13,635% since 1971 vs. the S&P 500’s 20,129%, including dividend reinvestment.
What’s the Best Course of Action as an Investor Now?
If you’re a long-term investor, you shouldn’t be too swayed by the performance of any market over just a six-month time span. If you’re a growth investor, for example, you shouldn’t be deterred from adding to the positions you like just because they have posted big gains. Over time, your high-flying stocks are likely to rise and fall, and investing regularly over the long run can help smooth out your portfolio’s ups and downs. Just be sure that your risk tolerance is high enough to ride out the tough times, like in 2022 when the NASDAQ Composite Index lost roughly one-third of its value, and individual stocks like Nvidia cratered more than 50%.
If you’re a dividend investor, you likely enjoy both the growth and income characteristics of those types of stocks along with their defensive qualities. In 2022, for example, the Dow Jones Industrial Average fell just 8.8% and the S&P 500 fell 18.01% vs. the 33.1% drop in the NASDAQ Composite Index. If you’re the type of investor who doesn’t mind trailing the big gains in the tech market in exchange for enduring much smaller losses in hard times, dividend stocks may still be the best opportunity for you. The same is true if you enjoy earning dividends paying 2-4% every year rather than getting all of your returns from capital gains.
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