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Why Dividend-Stock Funds Are Still Worthwhile

They won't excel in every down market, but the long-term investment case remains solid.

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Dividend stocks are often thought of as dull but reliable, lagging in bull markets but holding up better in tough times. But in 2020, they lived up to only part of the bargain. As the novel coronavirus roiled the market in February and March, the MSCI USA High Dividend Yield GR Index dropped 32.6%, nearly matching the S&P 500’s loss. (The average dividend-stock fund lost closer to 37% over the same period.) When the market bounced back starting in the second quarter, dividend stocks failed to keep pace with the broader market's surprisingly strong gains.

Dividend stocks suffered in early 2020 partly because scores of companies (including major firms like Disney (DIS), Royal Dutch Shell (RDS.A), and General Motors (GM)) either reduced or suspended their dividends as the sudden economic decline from the coronavirus dented profitability and cash flow. Sector exposure was another factor that weighed down returns, as dividend stock benchmarks are light on the technology issues that have led the market. Investment style is a closely related reason for dividend stocks’ underperformance, as they lean heavily toward value instead of the high-growth, momentum-oriented stocks that led the market during most of 2020.

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Amy C. Arnott has a position in the following securities mentioned above: DIS. Find out about Morningstar’s editorial policies.