Confidence when needed most
During times of weaker-than-expected economic growth, dividend growers have at times outperformed high yielding stocks. We believe this is due in part to the level of confidence that company managements convey when they increase dividend payouts.
It follows that when macroeconomic data come in weaker than expected, strong dividend growers can sometimes show more resilience than high yielders. Such has been the case historically.
As with many market phenomena, the relationship is not perfectly correlated, but historical data show higher growers outperforming during negative economic surprises with notable reliability. Consider the period between January 2003 and June 2015. During this span, the Citigroup Economic Surprise Index was in negative territory approximately 45% of the time. Overall, during these negative stretches, the ratio of dividend growers to high yielders advanced by more than 5% on an annualized basis.
Data: Ned Davis Research (www.ndr.com)
The Citigroup Economic Surprise Index is a rolling measure of beats and misses of indicators relative to consensus expectations.