The Power Of Dividends: Past, Present, And Future - Hartford Funds

InsightDo Dividend Policies Affect Stock Performance?In an effort to learn more about the relative performance of companiesaccording to their dividend policies, Ned Davis Research conducted a studyin which they divided companies into two groups based on whether or notthey paid a dividend during the previous 12 months. They named these twogroups “dividend payers” and “dividend non-payers.”The “dividend payers” were then divided further into three groups based ontheir dividend-payout behavior during the previous 12 months. Companiesthat kept their dividends per share at the same level were classified as “nochange.” Companies that raised their dividends were classified as “dividendgrowers and initiators.” Companies that lowered or eliminated theirdividends were classified as “dividend cutters or eliminators.” Companiesthat were classified as either “dividend growers and initiators” or “dividendcutters and eliminators” remained in these same categories for the next 12months, or until there was another dividend change.For each of the five categories (dividend payers, dividend non-payers,dividend growers and initiators, dividend non-payers, and no change individend policy) a total-return geometric average was calculated; monthlyrebalancing was also employed.It’s important to point out that our discussion is based on historicalinformation regarding different stocks’ dividend-payout rates. Such pastperformance can’t be used to predict which stocks may initiate, increase,decrease, continue, or discontinue dividend payouts in the future.Based on the Ned Davis study, it’s clear that companies that cut theirdividends suffered negative consequences. In FIGURE 7, dividend cuttersand eliminators (e.g., companies that completely eliminated their dividends)were more volatile (as measured by beta4 and standard deviation5) andfared worse than companies that maintained their dividend policy.Companies that grewor initiated a dividendhave experiencedthe highest returnsrelative to otherstocks since 1973—with significantly lessvolatility.Lowest Risk and Highest Returns for Dividend Growers & InitiatorsIn contrast to companies that cut or eliminated their dividends, companiesthat grew or initiated a dividend have experienced the highest returnsrelative to other stocks since 1973—with significantly less volatility. Thishelps explain why so many financial professionals are now discussing thebenefits of incorporating dividend-paying stocks as the core of an equityportfolio with their clients.FIGURE 7Average Annual Returns and Volatility by Dividend PolicyS&P 500 Index 1973-2021Dividend Growers & InitiatorsDividend PayersNo Change in Dividend PolicyDividend Non-PayersDividend Cutters & EliminatorsEqual-Weighted S&P 500 %18.43%22.02%24.96%17.64%Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only. Data Sources: Ned Davis Research andHartford Funds, 12 /21.4 Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index.5 Standard deviation measures the spread of the data from the mean value.6

InsightDividend Growth May Be a Key to OutperformanceThis excess cash should allow businesses with existingdividends to maintain, if not grow, their dividends. Andwhile interest rates are beginning to rise, they’re still lowby historical standards, which means dividend-payingstocks continue to offer attractive yields relative to manyfixed-income asset classes.Corporations that consistently grow their dividends havehistorically exhibited strong fundamentals, solid businessplans, and a deep commitment to their shareholders.The market environment is also supportive of dividends.A strong US economy has helped companies growearnings and free cash flow, resulting in record levels ofcash on corporate balance sheets (FIGURE 9).FIGURE 8FigReturns8of S&P 500 Index Stocks by Dividend Policy: Growth of 100 (1973–2021) 15,000 14,405 Dividend Growers and Initiators 14,000 13,0004,949,663 12,000Fig 8 11,000 15,000 10,000 5,000,000795,823 14,000 9,000 S&P 500 Index Total Return (Reinvesting Dividends) 8,000 4,949,663 8,942Dividend Payers 4,744Equal-Weighted S&P 500 Index 2,854No Change in Dividend Policy 12,000 S&P 500 Index Price Only (No Dividends) 4,000,000 7,000 11,000 6,000 10,000 3,000,000 5,000 2,000,000 13,000 9,000 4,000 795,823 3,000 8,000 7,000 1,000,000 2,000 6,000 1,000 5,000 989Dividend Non-Payers 0 4,000 80Dividend Cutters & Eliminators 002 3,000 2,000Averagefor AllDecadesThe20%Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes 1,000only. Data Sources: Ned Davis Research and Hartford Funds, 2 /21. 0Future 4,000for Dividend Investors197219821992FIGURE 9Average annual total return 3,500,000 3,000,000 S&P S&P 2,500,000 2,000,000 1,500,000 1,000,000 500,000 03Q2021FigReserve12Data Sources: Federaland Hartford Funds, 12 /21.0060in BillionsAverageTrend 1:30%High 3,500Corporate Cash Could Bode Well12% forRecord Levels of Cash on Corporate Balance Sheets16%for All28%15%DecadesDividends 3,000(1945–2021)17%In the aftermath of the financial crisis, corporationsbegan 4,000 2,50010%accruing recordprofits, and their balance sheets have40%1930 3,500swelleda result.Cash on corporate balance sheets has67% as 2,00044%12.31.21 5% 3,00073% the early 2000s.more than 1,500tripled sinceNA* Corporations ng 2,5000% 1,0001940s1950s 1960sor1970s1980s1990s 2000s hese1930options 2,00012.31.21 500may be attractivein some environments, during uncertain 1,500times some corporationsmay be more cautious and 0 1,000choose to hold 1945on to theirin case1975of another1955cash19651985 economic199520053Q2021 500downturn. Companies may also choose to use excess cashto initiate a dividend or increase their existing dividend %770%Fi

01960197019801990200020102019 4,0002021 3,000 2,000InsightFig 2 1,000 01972198219922002Average annual total return20%30%15%28%12%16%Averagefor AllDecadesFIGURE 10 shows the confluence of two positive trends that could benefit17%dividend investors:high corporate profits for S&P 500 Index companies10%coupled with near record-low payout ratios. The average dividendpayout40%67%44%ratio over 5%the past 95 out ratio stood at just 31.56%—leaving plentyof room for growth.0%1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s193012.31.21 4,000High corporate profitsand near record-lowpayout ratios couldbenefit dividendinvestors. 3,500 3,000 2,500 2,000 1,500 1,000FIGURE 10 500 01945S&P 500 Index Dividend Payout Ratio Quarterly Data (log scale)(3/31/1926–12/31/2021)g 10 200195519651975198519952005GAAP Reported Earnings Per Share 191.38Dividends Per Share 60.40 160 120 80 40 0400%Average Dividend Payout Ratio 56.6%Dividend Payout Ratio 1965197019751980198519901995200020052010n S&P 500 Index GAAP Reported Earnings Per Sharen Dividend Payout Ratio % (Trailing 4Q Cash Dividends / Trailing 4Q Reported Earnings)n S&P 500 Dividends Per Sharen Average Dividend Payout RatioPast performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only.Data Sources: Ned Davis Research and Hartford Funds, 12 /21.820213Q2021

InsightTrend 2: Low Bond Yields Could Bode Well for DividendsWith bond yields still at relatively low levels, dividend-paying stocks may beappealing to many investors who are seeking yield. For example, retiringbaby boomers who are searching for income-producing investmentsand institutional investors seeking yield may find dividend stocks moreattractive than today’s low-yielding bonds.FIGURE 11Yields for US Stocks Compare Favorably to Corporate Bonds(1901–2021)15% 14,405 Dividend Growers and Initiatorsn Corporate Bond Yield12%n US Stock Yield9% 8,942Retiring baby boomerswho are searchingfor income-producinginvestments andinstitutional investorsseeking yield may finddividend stocks moreattractive than today’slow-yielding bonds.Dividend Payers6% 4,7443%2021Equal-Weighted S&P 500 Index 2,854No Change in Dividend Policy 989Dividend Non-Payers0% 80Dividend Cutters & Eliminators1901192119411961198120012021Data Sources: Bond Data - S&P High Grade Corporate Bond Index (1901-1968), Citigroup HighGrade Corporate Bond Index (1969-1972), Barclays Capital Govt /Corp Bond Index (1973-1975),Barclays US Aggregate Bond Index (1976-2021); Stock Data - Cowles Commission All StocksIndex (1901-1925), S&P 500 Index (1926-2021); and Hartford Funds. 3,500,000 S&P 500 Total Return (Reinvesting Dividends)As of December 31, 2021, 49% 3,000,000of the stocksin the S&P 500 Index have S&P 500 Price Only (No Dividends)dividend yields higher than the10-Year US Treasury Note—that number 2,500,000being one of the highest on record. There have only been eight calendar 2,000,000years that ended with more than 40% of S&P 500 Index stocks yielding 1,500,000more than bonds. Of those years, only one—1974—was prior to 2008 (see 1,000,000FIGURE 12). 500,000FIGURE 123Q2021 0Percentage of S&P 500 Stocks with Dividend Yields Greater than10-Year Treasury Yields (1972–2021)Fig 1280%70%60%50%40%30%Past performance does not guarantee future results.Indices are unmanaged and not available for direct investment.Circles represent year-end values, as of 1974, 2008, 2011, 2012,2015, 2019, 2020, and 2021. For illustrative purposes only. DataSources: Ned Davis Research and Hartford Funds, 12 0152021

InsightTrend 3: Financial Repression and Institutional InvestorsThe US Federal Reserve (Fed) held interest rates low in the aftermath of theGreat Recession. They attempted to normalize rates from 2015–2018, thencut them again in 2019 and 2020. The Fed is expected to raise rates multipletimes in 2022, but numerous rate hikes would be needed to get rates backto 2007 levels.We generally think of monetary policy as a catalyst to help accelerate ordecelerate economic activity, but it can also be used for other purposes. Bykeeping interest rates low, the Fed helps keep interest payments onthe national debt low. In other words, low interest rates benefit not onlybusinesses and consumers who want to borrow money, but also thebiggest debtor in the world: the US government.Low interest rates benefit debtors and punish savers. Investors who havemoney in CDs,6 money market funds,7 and savings accounts8 are receivingstartlingly low rates. Meanwhile, low interest rates make it easier for theUS government to make payments on outstanding debt. These lower debtpayments make severe austerity measures less necessary in the shortterm. But the burgeoning level of US government debt could one day leadto severe austerity measures.Low interest ratesmake it easier for theUS government tomake payments onoutstanding debt,and these lower debtpayments make severeausterity measuresless necessary in theshort term.Low interest rates are especially problematic for institutional investors.How long can a pension plan with an actuarial discount rate of 6% or highercontinue to accept 10-Year US Treasury Bonds9 that yield around 2%?Institutional investors who have identified the trend toward financialrepression have numerous options, including high-yield bonds,10 bankloans,11 sovereign debt of foreign countries,12 REITs,13 and dividend-payingstocks.14In fact, since 2008, institutional investors have poured nearly 88 billioninto equity-income funds while individual investors have withdrawn nearly 99 billion from them over the same time period (see FIGURE 13). It’s notuncommon for institutional investors to be ahead of the general publicwhen it comes to investing, but how long will this striking disparity last?6A CD (certificate of deposit) is a savings certificate entitling the bearer toreceive interest. A CD bears a maturity date, a specified fixed interest rateand can be issued in any denomination. CDs are insured up to 250,000per depositor by the Federal Deposit Insurance Corporation (FDIC) or theNational Credit Union Association (NCUA).7 Money market funds are not insured or guaranteed by the FederalDeposit Insurance Corporation (FDIC) or any other governmentagency. Although the funds seek to preserve the value of theinvestment at 1.00 per share, it is possible to lose money byinvesting in the funds.8 A savings account is an account provided by a bank for individuals to savemoney and earn interest on the cash held in the account. Savings accountsare typically insured by the Federal Deposit Insurance Corporation (FDIC).9 US Treasury Bonds are backed by the US government and are guaranteedas to the timely payment of principal and interest. This guarantee does notapply to the value of fund shares.10 High-yield securities, or “junk bonds,” are rated below-investment-gradebecause there is a greater possibility that the issuer may be unable to makeinterest and principal payments on those securities.1011 Bank loans are below-investment-grade, senior-secured, short-term loansmade by banks to corporations. They are rated below-investment-gradebecause there is a greater possibility that the issuer may be unable to makeinterest and principal payments on those securities.12 A government bond is a bond issued by a national government denominatedin the country’s own currency. Bonds issued by national governments inforeign currencies are normally referred to as sovereign bonds. Timelypayment of interest and principal payments on sovereign debt is dependentupon the issuing nation’s future economic health and taxing power.13 A REIT, which stands for Real Estate Investment Trust, is a company thatowns or manages income-producing real estate. REITs are dependent uponthe financial condition of the underlying real estate. Risks associated withREITs include credit risk, liquidity risk, and interest-rate risk.14 A stock is an instrument that signifies an ownership position (called equity)in a corporation, and represents a claim on its proportional share in thecorporation’s assets and profits. Dividends are a distribution of a portionof a company’s earnings, decided by the board of directors, to a class of itsshareholders. There are no guarantees connected with the dividend payoutsfor dividend-paying stocks.

InsightFIGURE 13Institutional Investors Have Gravitated to Equity-Income Mutual Funds While Individual Investors Have Fled ThemCumulative Net Asset Flows (2008–2021)100Billions ( 2012201320142015201620172018201920202021Flows into the equity-income category can vary significantly from year to year as different funds move in and out of the category.Sources: Morningstar and Hartford Funds, 12 /21.SummaryDividends have historically played a significant role in totalreturn, particularly when average annual equity returnshave been lower than 10% during a decade.Stocks in the highest quintile of dividend yields havehistorically underperformed stocks in the secondquintile. Therefore, investors should only use yield asone consideration when selecting a dividend-payinginvestment.Furthermore, dividend growers and initiators havehistorically provided greater total return with less volatilityrelative to companies that either maintained or cut theirdividends.Trends that bode well for dividend-paying stocks includehistorically high levels of corporate cash, historically lowbond yields, and baby boomers’ demand for income thatwill last throughout retirement.Today’s interest rates have led to financial repressionas a way for the US government to help reduce thedeficit without severe austerity measures. This has ledinstitutional investors to invest heavily in dividendpaying stocks and strategies, which has helped bolstertheir performance. This trend could continue as long asinterest rates remain relatively low, and demand for theseinvestments will only grow if retail investors follow the leadof institutional investors.Talk to your financial professional about the benefits ofincorporating dividend-paying stocks into your portfolio.11

InsightHartford Funds Dividend-Paying FundsClass I TickerHartford Equity IncomeHQIIXHartford Dividend and GrowthHDGIXHartford Balanced IncomeHBLIXInvestors should carefully consider a fund’s investment objectives,risks, charges, and expenses. This and other important information iscontained in a fund’s full prospectus and summary prospectus, whichcan be obtained by visiting hartfordfunds.com. Please read it carefullybefore investing.Important Risks: Investing involves risk, including the possible loss ofprincipal. There is no guarantee a fund will achieve its stated objective.Security prices fluctuate in value depending on general market and economicconditions and the prospects of individual companies. Fixed income securityrisks include credit, liquidity, call, duration, and interest-rate risk. As interestrates rise, bond prices generally fall. For dividend-paying stocks, dividendsare not guaranteed and may decrease without notice. Foreign investmentsmay be more volatile and less liquid than US investments and are subject to therisk of currency fluctuations and adverse political and economic developments. Different investment styles may go in and out of favor,which may cause a fund to underperform the broader stock market.hartfordfunds.com888-843-7824This information should not be considered investment advice or arecommendation to buy/sell any security. In addition, it does not take intoaccount the specific investment objectives, tax and financial condition of anyspecific person. This information has been prepared from sources believedreliable but the accuracy and completeness of the information cannot beguaranteed. This material and /or its contents are current at the time of writingand are subject to change without notice.Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD),Member FINRA. Advisory services are provided by Hartford FundsManagement Company, LLC (HFMC). Certain funds are sub-advisedby Wellington Management Company LLP. HFMC and WellingtonManagement are SEC registered investment advisers. HFD and HFMCare not affiliated with any sub-adviser.WP106 0322 227770hartfordfunds.com/linkedin

a more granular perspective. From 1930-2021, dividend income's contribution to the total return of the S&P 500 Index averaged 40%. Looking at S&P 500 Index performance on a decade-by-decade basis shows how dividends' contribution varied greatly from decade to decade. FIGURE 2 Dividends' Contribution to Total Return Varies By Decade