Using Factor Analysis To Explain The Performance Of Dividend Strategies

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Dividend-paying stocks have historically underperformed during periods of rising interest rates.

Certain dividend indexes have recently bucked long-term trends by performing well in spite of rising 10-year Treasury yields.

The performance of dividend indexes can vary widely depending on factor exposure.

Factor tilts have resulted in divergent dividend strategy performance following the November elections

By Nick Kalivas, Senior Equity Product Strategist

November's US elections have buoyed investor optimism about the potential for tax reform, increased infrastructure spending, reduced regulation and accelerating economic growth. These expectations led to a 0.75% spike in the 10-year Treasury yield between Nov. 8 and Dec. 16, and a 5.2% increase in the US dollar, as measured by the US Dollar Index.1

Still, by historical standards, interest rates remain low. Nearly a decade ago, the 10-year Treasury yield finished 2007 at 4.02%; it now stands near 2.50%.1 When adjusted for inflation, even the 0.75% bump in the 10-year Treasury yield amounts to a modest 0.40% increase. Compare that with the average annual real (inflation-adjusted) increase in the 10-year Treasury yield between January 1962 and November 2016 of 2.40%.1

Shouldn't dividend stocks be underperforming?

Global demand for dividend-paying exchange-traded funds (ETFs) is strong, as evidenced by robust flows of over $20 billion in 2016; US-based ETFs accounted for more than half of that amount.1 The appeal of dividend-paying stocks is clear, as dividends can help provide a nice offset to rising inflation, while most fixed-coupon debt cannot hedge against rising prices.

Nonetheless, the timing of recent gains is counterintuitive; typically, rising interest rates cause dividend-paying shares to lag. This is because yield-seeking investors tend to trade out of dividend stocks and into bonds when interest rates rise. This can be seen in the chart below, which depicts the relationship between the excess monthly return of dividend-paying stocks (represented by the S&P 500 Low Volatility High Dividend Index relative to the S&P 500 Index) to the monthly change in the 10-year Treasury yield. Note the inverse relationship, with higher yields creating a drag on the excess returns of dividend payers.

Relationship between the excess monthly return of dividend-paying stocks

Source: Bloomberg L.P., Dec. 16, 2016. Past performance cannot guarantee future results. An investment cannot be made in an index.

Dividend stock performance running contrary to long-term trends

With yields rising, dividend stocks are bucking this long-term trend, although performance has varied by index. Following the Nov. 8 election through Dec. 16, the S&P 500 Low Volatility High Dividend Index lagged the S&P 500 Index by only five basis points, returning 5.76%, while the NASDAQ US Dividend Achievers 50 Index outpaced the S&P 500 Index by 3.20%, returning 9.01%.1 These counterintuitive returns may have investors wondering about the reasons behind the results.

One way to analyze portfolio returns is through factor exposure. Both the S&P 500 Low Volatility High Dividend Index and the NASDAQ US Dividend Achievers 50 Index are dividend-based indexes, but each has different factor tilts beyond just dividends, which can affect performance.

Let's take a closer look:

  • The S&P 500 Low Volatility High Dividend Index has a value factor load of 0.51 and a growth factor load2 of -0.60, meaning that it is more of a value-oriented index than a growth index.1 Keep in mind that value stocks outperformed growth stocks following the election. From Nov. 8 through Dec. 16, the S&P 500 Value Index rose 8.66%, compared with 5.81% for the S&P 500 Index and just 3.07% for the S&P 500 Growth Index, which helps explain the strong performance of the S&P 500 Low Volatility High Dividend Index.1 Put another way, meaningful value exposure and negative growth exposure helped to mute the impact of rising rates - boosting index performance.
  • By contrast, the NASDAQ Dividend Achievers 50 Index did not have material value exposure, but did have negative exposure to the growth factor (-0.43). More importantly, the index had a negative factor load (-0.90) to large-cap stocks, with 44% of its holdings in smaller-cap stocks.1 Thus, with the S&P SmallCap 600 Index outpacing the large-company S&P 500 Index by 10.35% from Nov. 8 through Dec. 16, the strong performance of the NASDAQ Dividend Achievers 50 Index is no great mystery.1

Factor exposure matters

To reiterate: While dividend-paying stocks may have surprised investors with their robust performance in the face of rising interest rates following the Nov. 8 election, much of this performance can be explained by factor tilts. In this case, exposure to value and smaller-cap stocks helped mitigate the impact of rising interest rates. As you can see, factors are not only valuable building blocks for constructing portfolios, but also useful tools for gauging portfolio performance.

Investors interested in dividend-paying ETFs may wish to consider the PowerShares S&P 500 High Dividend Low Volatility Portfolio or the PowerShares High Yield Equity Dividend Achievers Portfolio.


  1. Bloomberg L.P., Dec. 16, 2016
  2. Factor load represents the sensitivity of a portfolio to market attributes such as value, growth, size, momentum, dividend yield, quality or volatility. A positive factor load represents higher sensitivity, and a negative factor load represents less sensitivity. Factor load can be calculated by regressing portfolio returns against a hypothetical portfolio containing specific market attributes.

Important information

Blog header image: Khakimullin Aleksandr/

A basis point is one hundredth of a percentage point.

The US Dollar Index measures the value of the US dollar relative to majority of its most significant trading partners.

The S&P SmallCap 600 Index is a market-value weighted index that consists of 600 small-cap US stocks chosen for market size, liquidity and industry group representation.

The NASDAQ US Dividend Achievers 50 Index comprises 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends.

The S&P 500 Growth Index consists of stocks in the S&P 500 Index that exhibit strong growth characteristics based on three measures: sales growth, earnings-to-price and momentum.

The S&P 500 Value Index consists of stocks in the S&P 500 Index that exhibit strong value characteristics based on three measures: book value-to-price, earnings-to-price and sales-to-price.

The S&P 500 Low Volatility High Dividend Index measures the performance of the 50 least-volatile high dividend-yielding stocks in the S&P 500 Index. The index is designed to serve as a benchmark for income-seeking investors in the US equity market.

Securities that pay high dividends as a group can fall out of favor with the market, causing such companies to underperform companies that do not pay high dividends.

There is no assurance that a fund will provide low volatility.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.

Before investing, investors should carefully read the prospectus/summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the funds, call 800 983 0903 or visit for a prospectus/summary prospectus.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.


All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.'s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.

©2017 Invesco Ltd. All rights reserved.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was posted on the Invesco PowerShares' blog by an Invesco PowerShares' employee on January 6, 2017:

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