If History is Any Indication, High Dividend Stock Outperformance Should Continue
Submitted by Sober Look as part of Trefis contributors
At times when faced with stressed financial conditions, it is helpful to look through history for periods that bear similarities to the current environment. Obviously no two periods are ever the same, but the period of mid 40s to early 50s in some ways resembles markets of today.
Throughout WW-II and for some time after, the Fed conducted what could amount to QE by capping treasury yields. It allowed the US Treasury to finance the war effort at historically low rates by continually purchasing treasury securities. As an example, below is an excerpt from the FOMC minutes of February 29, 1944.
As expected it was the high dividend stocks that outperformed during that period. The chart below from Barclays Capital shows the relative performance of high to low dividend stocks.
The outperformance lasted for some five years through the stress period. In 1951 the Treasury-Fed Accord eliminated the Fed’s obligation to the US Treasury to purchase its securities at a fixed rate (which was forcing the Fed to grow balance sheet indefinitely.) This event began the normalization of the Fed’s monetary policy and ended the outperformance of high dividend stocks.
The chart below compares the Vanguard High Dividend ETF (VYM) with the overall market (SPY). Over the past year, VYM has outperformed SPY by close to 7%.
Based on the similarities between the post WW-II period and now, this high dividend stock outperformance should continue until the Fed ends the period of easy monetary policy. And from all the indications we have, the Fed’s extraordinary accommodation should be in place for some time to come.