How do Income Stocks Perform in Down Markets?
About the Video
Stocks are off to a rough start this year, and clients are asking how income strategies perform in down markets. Chief Investment Officer Greg Powell looks back at high-yield equity returns versus the S&P 500 Index over the last 50 years. While results can vary, high-yield equities have historically offered both better downside protection and higher average returns over long holding periods.
How do Income Stocks Perform in Down Markets?
How do Income Stocks Perform in Down Markets?

Greg Powell: Stocks are off to a rough start this year, with investors worried about inflation, higher interest rates, and military conflict. While it is far too early to know how this year will end up, clients are asking how income strategies tend to perform in down markets.

Dividend Stocks in Down Years
(1971-2021)
Dividend Stocks in Down Years

As of December 31, 2021. Sources: Morningstar Direct; Fama/French Research data library; Miller/Howard Research & Analysis. Based on the rolling 10-year annualized total returns, ending each calendar year. High-Yield Stocks data are provided by the Fama/French Research data library. The High-Yield Stocks portfolio uses Deciles 7 through 9 of portfolios created by dividend yield (value weighted returns), where 1 is the lowest and 10 is the highest.

Looking back at the last fifty years, the S&P 500 Index has had ten down years. High-yield equities, defined as deciles 7 through 9 of dividend yields, outperformed the S&P 500 in 70% of the down years, and actually had positive absolute returns 40% of the time. Overall, high-yield stocks outperformed the S&P 500 by almost 9% during the down years.

Of course, some equity income portfolios will do better, and some will do worse. What’s important is that we are searching for investment candidates from a pool that has historically provided downside protection.

While it’s gratifying to know that income stocks tend to outperform in down markets, our view continues to be that it’s best not to try to time the market. Fluctuations in the overall market are very unpredictable but typically buy-and-hold investors are well rewarded.

Returns on 10-Year Holding Periods
(1971-2021)
Returns on 10-Year Holding Periods

As of December 31, 2021. Sources: Morningstar Direct; Fama/French Research data library; Miller/Howard Research & Analysis. Based on the rolling 10-year annualized total returns. Each dot represents the trailing 10-year annualized total return, ending each calendar year. High-Yield Stocks data are provided by the Fama/French Research data library. The High-Yield Stocks portfolio uses Deciles 7 through 9 of portfolios created by dividend yield (value weighted returns), where 1 is the lowest and 10 is the highest.

Looking at the total return for 10-year holding periods ending over the past 50 years, investors in the S&P 500 saw a compound average annual return of 10.3%.

But the range of outcomes was large with the maximum annual return of 19.2% for the ten-year period ending in 1998 and a negative 1.4% annual return for the period ending in 2008.

High-yield equities have fared better. The average annual return for high-yield equities held over 10-years was 12.1%, meaning a $100 investment grew to $315, well ahead of the S&P 500 average return.

While rare, there were two 10-year periods, those ending in 2008 and 2009, in which the S&P 500 produced negative returns.

In contrast, over the last 50 years high-yield equities did not have a single 10-year period with a negative return.

Returns on 10-Year Holding Periods
(1971-2021)
Returns on 10-Year Holding Periods

As of December 31, 2021. Sources: Morningstar Direct; Fama/French Research data library; Miller/Howard Research & Analysis. Based on the rolling 10-year annualized total returns. Each dot represents the trailing 10-year annualized total return, ending each calendar year. High-Yield Stocks data are provided by the Fama/French Research data library. The High-Yield Stocks portfolio uses Deciles 7 through 9 of portfolios created by dividend yield (value weighted returns), where 1 is the lowest and 10 is the highest.

Looking at this chart differently, a $100 investment in the S&P 500 grew to $267 on average over ten years, whereas high-yield stocks grew to $315.

While results can vary, high-yield stocks have historically offered both better downside protection and higher average returns over long holding periods. For more information, please see our website at www.mhinvest.com.

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. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. To receive a list of all recommendations for the previous year, please email compliance@mhinvest.com. 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.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

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 appropriate 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 appropriateness. 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.

The returns on a portfolio that utilizes environmental, social, or governance (ESG) criteria for stock selection may be lower or higher than portfolios where ESG factors are not considered, and the investment opportunities available to such portfolios may differ.

Past performance does not guarantee future results.

© 2022 Miller/Howard Investments.

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. Nothing stated herein, including the mention of specific company names, should be construed as a recommendation to buy, hold, or sell any security, sector, or MLPs in general. To receive a list of all recommendations for the previous year, please email compliance@mhinvest.com. 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.

Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors, and the amount of any dividend may vary over time. Dividend yield is one component of performance and should not be the only consideration for investment.

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 appropriate 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 appropriateness. 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.

The returns on a portfolio that utilizes environmental, social, or governance (ESG) criteria for stock selection may be lower or higher than portfolios where ESG factors are not considered, and the investment opportunities available to such portfolios may differ.

Past performance does not guarantee future results.

© 2022 Miller/Howard Investments.