Rolling Excess Return of High-Yield Stocks
About the Video
Past performance is no guarantee of future returns. But interpreting market tendencies and recognizable historical patterns can be meaningful in investment decision making.
Rolling Excess Return of High-Yield Stocks

This Transcript MUST be used in conjunction with the video

October 28, 2015

Voiceover (VO):
Though past performance is no guarantee of future returns, we often look to the past for guidance as the future often rhymes with the past. What are the lessons of past market bubbles, for instance, or what has been the performance of certain sectors and industries during rising interest rate environments or economic recessions?

As research-focused managers, our examination of the historical performance of high-income-producing equities and how they compared to broad market indexes was instrumental in our decision to make dividend-paying equities a firm focus.

There are several reasons why we think investors should include dividend-paying equities in their portfolios. In this video, we consider just one of these reasons—the historical excess return of High-Yield Stocks vs. the S&P 500 Index.

To measure the historical performance of High-Yield Stocks, we look at market returns delineated by dividend yield.

We start by slicing up the market by dividend decile, with Decile 10 containing the highest-yielding dividend stocks and Decile 1 the lowest-yielding dividend stocks. Decile 0 contains all non-dividend paying stocks.

For this video we have grouped together Deciles 7‒9 to represent the high-yield stock universe. We omit Decile 10 (or the top 10% of dividend payers) in order to bias the selection toward what we consider to be higher quality stocks. It is not unusual to find distressed companies in Decile 10.

So how have High-Yield Stocks historically performed vs. the S&P 500 Index?

Let’s take a look at the excess return of High-Yield Stocks vs. the S&P 500 Index over various rolling time periods.

First, over rolling 3-year time periods. Since 1940, high-yields stocks have outperformed the S&P 500 Index 70% of the time.

The percentages are similar for rolling 5-year periods, as well as for rolling 7-year periods AND increases to 86% over rolling 10-year periods.

Let’s take another look at this and keep in mind that we are looking at almost 75 years of market data.

We can also look at this comparison by decades. How did High-Yield Stocks perform during the 1940s, 1950s, and so on.

Here again, the numbers are very supportive for dividend-focused investors.

High-Yield Stocks have outperformed over every decade except the 1990s.

Surely 75 years is much longer than most investors’ time horizon. But 10 years seems a reasonable investment time horizon. Just consider what you were invested in 10 years ago compared to today.

But what about tomorrow? Can the past performance of High-Yield Stocks tell us anything about potential future returns?

The question may be impossible to answer but curiosity drove us to look at three previous periods when the rolling 10-year return of High-Yield Stocks underperformed the S&P 500 Index. Each of these times had more than one consecutive month of rolling 10-year underperformance. You can see the three periods highlighted here.

How would an investment of High-Yield Stocks have performed, if you had invested during one of these periods of underperformance?

For this hypothetical scenario, we looked at 3-, 5-, and 7-year returns if you had invested in High-Yield Stocks at the beginning of each period of underperformance, in the middle of each period, and if you had invested at the end of each period, as High-Yield Stocks began to outperform the S&P 500 again over a rolling 10-year period.

Intuition told us that the performance of High-Yield Stocks coming out of periods of underperformance would look attractive as returns reverted back to the mean. Let’s take a look at the details from each of the three previous periods of underperformance for High-Yield Stocks.

The first period covers June 1955 to December 1958. This hypothetical scenario shows High-Yield Stocks outperforming the S&P 500 over 3-, 5-, and 7- year periods regardless of whether you had invested at the beginning, during the middle, or at the end of this period of underperformance.

Somewhat surprisingly, the pattern repeated itself during a second period of underperformance, June 1972 to December 1973.

And then again, June 1998 to December 2000, during a third period of underperformance.

Past performance is no guarantee of future returns. Evaluation and analysis of historical trends can be complex, nuanced, and at times misleading. But interpreting market tendencies and recognizable historical patterns can also be meaningful in investment decision making.

DISCLOSURE:
Data calculated with Morningstar Direct.

Periods of underperformance shown in this illustration pertain to those with more than one consecutive month of rolling 10-year underperformance.

The investment returns of High-Yield Stocks relative to the S&P 500 Index presented in this illustration represent past performance and should not be considered indicative or representative of future performance for either High-Yield Stocks in general or any of the investment strategies managed by Miller/Howard Investments in particular.

“High-Yield Stocks” in this illustration comprises Deciles 7 to 9 from the data set created by Eugene Fama and Kenneth French, called “Portfolios Formed on Dividend Yield,” in which all NYSE, AMEX, and NASDAQ stocks with Market Equity for June of year T, and at least seven monthly returns, were separated into deciles based on dividend yield (Decile 10 being the highest yielding). The file was created by CMPT_DP_RETS using the CRSP database. D/P (in percent) was computed with breakpoints at the end of each June.

Miller/Howard utilizes the value-weighted returns for this study. Miller/Howard has chosen dividend Deciles 7 to 9 because the firm thinks that profile most accurately reflects the composition (solely based on dividend yield) of the stocks in Miller/Howard Investments’ Income-Equity Strategies and High-Yield Equity. More specifically, these companies have a dividend yield that is in the range of slightly better than market average to near the top decile. The highest decile is omitted because many distressed stocks and outliers are commonly found in the 10th dividend yield decile.

Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon. Past performance is no guarantee of future results.

Hypothetical past performance in this report is for illustration purposes only. You would not necessarily have obtained these performance results if you had held this strategy for the periods indicated. Actual performance results of accounts vary due to factors such as the timing of contributions and withdrawals, client restrictions, rebalancing schedules, fees, and costs.

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value. Historical data for the S&P 500 index is taken from the work of Robert Shiller. This data set consists of monthly stock price, dividends, and earnings data, all starting January 1871. An index is unmanaged and is not available for direct investment.

ALL INVESTMENTS INCUR RISK. VIDEO DISCUSSIONS ARE GENERAL IN NATURE AND NOT REFLECTIVE OF A SPECIFIC MILLER/HOWARD MUTUAL FUND

© 2018 Miller/Howard Investments.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.