Investors in US and global equities are continuing to experience short-term market shocks. High inflation prints, as measured by the personal consumption expenditures (PCE), have forced the US Federal Reserve (Fed) to pursue an aggressive rate increase policy this year. On 15 June 2022, the Fed announced a 75 basis point increase in the Fed Funds Target Rate. The Fed last increased interest rates by 75 basis points in November 1994, when (then) Fed Chair Alan Greenspan was worried about the economy overheating, but inflation was not as high.

The increase in interest rates affects stock prices by compressing the valuation premium of future earnings. This will often have more of an effect on growth stocks, as they would typically trade at higher price-to-earnings multiples. While the Fed has been clear on its intention to raise interest rates, this policy has benefited the relative performance of value stocks, including Dividend Aristocrats.

Figure 1: Dividend Aristocrats Performance Against Fed Funds Rate (Trailing 6-month returns)

Ryan Reardon, Senior Smart Beta Strategist at State Street SPDR ETFs: “Similar to the first half of 2015, the last time the Fed engaged in a program to raise interest rates, the S&P High Yield Dividend Aristocrats® Index has outperformed the S&P 500® Index during the first six months of 2022 (see Figure 1). In addition to providing exposure to the value trade, Dividend Aristocrats can also be quite defensive. Dividend Aristocrats stocks tend to be lower beta, which can offer a degree of protection in periods of quick market drawdowns. Since mid-2015 – six months prior to the Fed engaging in a program to raise rates – the S&P 500 Index has experienced 11 pullbacks of greater than 5% during 30-day periods. In 9 of the 11 drawdowns, the SPDR S&P U.S. Dividend Aristocrats has delivered protection through excess returns (see Figure 2).”

The beginning of the pandemic in March 2020 was the only material outlier as growth stocks like technology and communication services were seen as the relative safe haven based on the idea that a global lockdown would accelerate structural changes, such as remote working. Even including this negative outlier, the average excess returns of SPYD during all 11 pullbacks is 2.97%.

In conclusion, 2022 continues to offer investors an opportunity in US and global dividend stocks, as inflation and rising interest rates persist as headwinds for growth stocks. Value stocks may benefit the most from this theme, but Dividend Aristocrats can help investors play the value trade while using the stable dividend focus to help protect against market drawdowns.

Figure 2: US Equity Drawdowns Greater than 5% (Since Mid-Rear 2015)