The popularity and performance of dividend investing seem to come in waves. Quality stocks with higher dividend yields often outperform benchmark indices for a year or two - leading to an overconcentration of investors in the factor. As this concentration fades, dividend stocks usually underperform for a similar time frame.
There have been around three cycles of outperformance and subsequent underperformance of dividend stocks over the past decade. However, the most recent wave of underperformance has been far worse than normal. This can be seen most clearly by comparing the iShares Core High Dividend ETF (NYSEARCA:HDV) to the Russell 2000 (IWM) which I believe to be the best U.S equity benchmark since it owns smaller domestic firms. See below:
As you can see, HDV has underperformed IWM by a significant degree over the past six months. The Russell 2000's performance of late has been stellar, but similar gains have been seen in most other major indices. For some reason, high dividend stocks are among the few which are still trading below their pre-COVID levels.
After such extreme underperformance, history tells us that outperformance may follow. Indeed, there is a lot to like about HDV. The companies in the ETF are far less expensive and have not gotten caught up in what appears to be a major speculative rally - a rally which I believe will be followed by a crash. Overall, it seems that HDV has a strong potential to outperform in the future and may offer greater resiliency in a bear market.
A Look at HDV's Holdings in 2021
Most of the stocks in the fund are "old and steady" companies that make up the backbone of corporate America. Of course, these are not firms that have great growth potential so they are not a top pick among speculators, but they are also unlikely
