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Insight • November 5, 2024
4 min. Read

Dividend Growers: A Less Volatile Approach to Building Long-Term Wealth

“Time in the market is more important than timing the market” is a concept that’s especially relevant for those investing in quality stocks. Here’s why.

In Brief

  • Investors have historically shown a tendency to reduce equity exposure after market drawdowns.
  • We believe that the long-term benefits of equity market compounding are powerful and attempting to time the market can result in less favorable outcomes.
  • Identifying a diversified strategy that focuses on owning high-quality, dividend growth companies could provide investors with lower volatility, attractive risk-adjusted returns, and perhaps lessen the tendency to reduce exposure to the equity market at inopportune times.

Buy low and sell high! This strategy has been preached since the beginning of investing. The thinking behind this maxim: When the equity market is expensive, investors should sell their winners and capture some of their hard-earned gains. When stocks are seen as cheap, often after a market downdraft, investors should increase their equity exposure and position themselves for future appreciation.

This approach is simple conceptually, yet it is much more complicated to execute in practice. Peaks and troughs are not necessarily foreseeable, and it is difficult to determine the duration of upward or downward moves in the equity market. This is why history has shown that those who stay invested or those who invest at regular intervals have had much better outcomes than those who tried to time the market.

Despite this evidence, investor behavior still shows a reluctance to stay invested in equity markets after periods of weak returns. Over the last 25 years, whenever major U.S. stock indexes had a double-digit drawdown over a quarter, it was common to see net outflows in the equity markets. In almost every instance, the market rebounded strongly over the following 12 months, meaning that some investors inverted the old cliché and “sold low,” missing out on that recovery (see Figure 1). 

Figure 1. Investors Exiting the Market During Drawdowns Have Missed Out on Major Recoveries

Data for the S&P 500® Index for the indicated periods
Figure 1
Source: Morningstar. Performance based on total return of S&P 500® Index in the periods following quarterly declines of 10% or more in the years 2000-2023.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.
 

Why Staying Invested Matters

The goal of investing is long-term wealth creation. This wealth creation is highlighted by two distinct phases. The first phase is wealth accumulation. Historically speaking, equities have been one of the most compelling asset classes to help build long-term wealth. While the percentage of one’s allocation to equities depends on their own time horizon and goals, we believe it is imperative to be steadfast in whatever that equity allocation is supposed to be. If we look at the last 25 years, missing the best 10, 20, or 30 days in the market had a profound impact on an investor’s portfolio (see Figure 2). For example, if you missed the 10 best performing days in the U.S. equity market, you could have a portfolio half the size of someone who remained fully invested in equities.

Figure 2. Equity Investors Who Stayed the Course Have Benefited the Most

Hypothetical growth of a $10,000 investment in the S&P 500® Index from January 1, 1998, to December 31, 2023
Figure 2
Source: Standard & Poor’s and Lord Abbett. Returns are measured based on the S&P 500® Index from January 1, 1998, to December 31, 2023. The “best” days to be invested are defined as those on which the S&P 500 Index delivered its highest returns for the given periods based on historical data. Annualized return and total return assumes the reinvestment of all dividends and/or capital gains.
Past performance is not a reliable indicator or a guarantee of future results. The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. The hypothetical results depicted were not achieved by any investor or investors; actual results may vary substantially. Indexes are unmanaged, do not reflect deduction of fees and expenses and are not available for direct investment.

If we are focused on long-term wealth creation, then we should measure returns over longer periods than a few days, one quarter, or even one year. Looking at annual returns of the S&P 500® Index since 1926, we can see that returns have been positive 73% of the time (see Figure 3). Over five-year rolling periods, this increases to 88%. Over 10-year periods, returns were positive 94% of the time. This further demonstrates the impact of remaining invested in equities through full market cycles; it has been rare to experience losses when measuring returns through such a long-term lens.

Figure 3. Through the Decades, Staying in the Market Has Built Wealth

Yearly return data for the S&P 500 Index, 1926–2023
Figure 3
Source: Standard & Poor’s and Lord Abbett. Calendar-year returns are measured based on the S&P 500® Index from January 1, 1926, to December 31, 2023.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.

The second phase of long-term wealth creation is wealth preservation during retirement. Over the last three decades, investors have experienced three major market downturns: the 1999-2000 “tech bubble,” the global financial crisis of 2008–09, and the onset of the COVID-19 pandemic in early 2020. In each of these periods, investors fled from equity markets in an attempt to preserve assets. Yet, a hypothetical investment in the S&P 500 versus a fixed-income alternative, the Bloomberg U.S. Aggregate Bond Index (with 5% withdrawals adjusted for inflation), shows two entirely different retirement outcomes (see Figure 4). While this is not a recommendation to have a 100% equity allocation, we think it is important for investors to keep in mind the long-term potential of equities to provide flexibility in retirement lifestyle and estate planning.

Figure 4. How Two Different Retirement Portfolios Have Fared Over the Past 30 Years

Hypothetical growth of a $250,000 investment in the S&P 500® and Bloomberg U.S. Aggregate Bond Indexes from December 31, 1993, assuming annual 5% withdrawals, to December 31, 2023
Figure 4
Source: Bloomberg and Lord Abbett. Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. The hypothetical results depicted were not achieved by any investor or investors; actual results may vary substantially. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.

Regardless of whether an investor is in the accumulation phase or the preservation phase, it’s worth repeating that it is important for investors to focus on “time in” the market as opposed to “timing” the market.

Weathering Tough Times with Dividend Growers

We believe a thoughtful and diversified approach is vital to weathering periods of market drawdowns. It is important to remain invested in the equity markets as the potential for long-term growth can lead to a larger nest egg in retirement. Yet, it is sometimes inevitable for emotional decision-making to take over during uncertain time periods. We think one way of alleviating this stress is by selecting a portfolio that has demonstrated lower volatility. If we look at the last 50 years of data, high-quality companies that are initiating and growing dividends have had higher returns and lower volatility than the equal-weighted index, as shown in Figure 5.

Figure 5. Dividend Growers Have Offered Higher Returns with Less Volatility

Data for the S&P 500 Index, January 31, 1973–September 30, 2023
Figure 5
Source: Ned Davis Research. Latest available historical data.
Dividend policy: A stock is classified as a dividend payer if it paid a cash dividend any time during the previous 12 months; a dividend grower if it initiated or raised its cash dividend at any time during the previous 12 months; and a non-dividend payer if it did not pay a cash dividend at any time during the previous 12 months. A company's dividend payments may vary over time, and there is no guarantee that a company will pay a dividend at all.
Standard deviation is a statistic that measures the dispersion of a data set relative to its mean. The higher the standard deviation, the further the observed data are from the mean.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.

Lower volatility may mean investors will be less likely to reduce equity exposure following a market drawdown. In a sense, if the drawdown is less severe or perhaps just lower than the overall S&P 500, an investor may be less likely to reduce equity exposure at an untimely moment. The outcome of owning a lower-volatility portfolio of dividend growth companies may mean not only attractive risk-adjusted returns but also a better “lived outcome”—one that is devoid of the risk of market timing that can limit long-term returns. Such an approach may leave investors in a better position to grow their wealth over the long term—and provide themselves with a more assured financial future.

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Dividend Growth Fund

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Affiliated Fund

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Glossary & Index Definitions

Standard deviation is a statistic that measures the dispersion of a data set relative to its mean. The higher the standard deviation, the further the observed data are from the mean.

The Bloomberg U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade, fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

Bloomberg Index Information

Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg owns all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, or make any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, shall not have any liability or responsibility for injury or damages arising in connection therewith.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries. The S&P 500® Equal Weight Index (EWI) includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment

Important Information

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

References to fund yields are for informational purposes only and are not meant to represent any specific Lord Abbett bond fund or portfolio.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

Dividend policy: A stock is classified as a dividend payer if it paid a cash dividend any time during the previous 12 months; a dividend grower if it initiated or raised its cash dividend at any time during the previous 12 months; and a non-dividend payer if it did not pay a cash dividend at any time during the previous 12 months.

Equity Investing Risks

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.

Fixed-Income Investing Risks

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. 

The credit quality of fixed-income securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions, and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

This material is the copyright © 2024 of Lord, Abbett & Co. LLC. All Rights Reserved. 

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Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.

FOR MORE INFORMATION ON ANY LORD ABBETT FUNDS, CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT DISTRIBUTOR LLC AT 888-522-2388, OR VISIT US AT LORDABBETT.COM FOR A PROSPECTUS, WHICH CONTAINS IMPORTANT INFORMATION ABOUT A FUND'S INVESTMENT GOALS, SALES CHARGES, EXPENSES AND RISKS THAT AN INVESTOR SHOULD CONSIDER AND READ CAREFULLY BEFORE INVESTING.

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