It should be no surpise considering today's uncertain economic and political environment that investors have been flocking to dividend-paying stocks. Historically, stocks that pay steady dividends tend to perform better during challenging market environments. As the European debt crisis continues to rattle markets and fears of a global economic slowdown persist, investors have been finding safety in predominantly large-cap, defensive stocks with attractive dividends. Additionally, with interest rates at historic lows, dividend stocks offer a much higher yield versus short-term debt instruments for investors who are willing to accept some equity market risk.
We have been hearing the pundits praise the benefits and appeal of dividend-paying stocks for over a year now but it hasn't been until recently that we have seen it manifested in the actual price action of the stock market. We conducted our own analysis by examining the performance of all S&P 500 stocks with a dividend yield of greater than 2.75% versus the overall performance of the S&P 500. From August 31st through November 30th, the 140 stocks in the S&P 500 with a dividend yield greater than 2.75% had an average return of +3.64%. The average return for the S&P 500 during that period was +2.30%. And that performance is price appreciation only, so including dividends will only make the relative returns of the 2.75%+ dividend-paying stocks even more impressive.
To illustrate this, we have generated a chart of these higher paying dividend stocks Download Dividends. An examination of the relative price action (the bottom line in the chart) shows the surge in performance since September. With such a disparity in performance, it looks like the pundits are finally putting their money where their mouths have been as dividend stocks have become a leadership segment of the market.
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