Ever since the financial crisis, cash has almost been a dirty word. Following the crisis, central banks around the world pushed interest rates to record lows in an attempt to stimulate economic growth by pushing money away from unattractive, low-interest savings accounts and into productive assets.
An unintended side effect of this policy is that trillions of investment dollars have flowed into stocks around the world, making equities by far the best investment over anything else.
As a result, for the past 10 years, equities have been the best asset to own for investors looking to make money. Over the past 12 months, however, this trend has completely reversed. Volatility has now returned and equities are no longer the guaranteed win they have been for the past decade.
Sentiment change
Stocks peaked at the beginning of October. Between Jan. 1 and Oct. 1, the Dow Jones added 7.5% while the S&P 500 gained 8.4%. The Nasdaq index was up 14.2% for the year to the beginning of October. Since then, the market has only gone down.
Only time will tell if this is the beginning of a significant bear market or not, but it seems that the peak of the bull market for the past 10 years was at the beginning of October. After two months of volatility, all significant indexes apart from the Nasdaq are in negative territory year to date. At the time of writing, the Nasdaq is sitting on a small gain of 0.3% for the year. All of the figures above exclude dividends.
What these numbers tell us is that in 2018, all major stock indexes in the U.S. have underperformed cash as an investment -- a sharp turnaround from the trend of the past 10 years. The current risk-free rate (the U.S. 10-year Treasury) is 3.07%.
If we look at the performance data for the past 12 months, the figures are not much better. Over the last year, the Dow Jones Industrial Average has printed a small gain of 4%. The S&P 500 is up 2.2%.
What is also interesting to note is that over the past 12 months, as volatility has returned, value investing, which is supposed to outperform in periods of market instability, has actually struggled compared to growth.
Value versus growth
The Russell 2000 Value Index is down 2.8% over the past 12 months compared to a small positive gain for the Russell 2000 Growth Index. Once again, both of these figures exclude dividends. Including dividends, growth, as represented by the iShares Russell 2000 Growth Exchange-Traded Fund, has produced a total return for investors of 0.4% while value (represented by the iShares Russell 2000 Value ETF) has yielded a negative performance of -1.0% (on a net asset value basis).
So what has outperformed cash this year? Well, from an index perspective, there's one style that has achieved a cash-beating return, and that's dividends. The SPDR S&P Dividend ETF, which searches the market for dividend aristocrats (defined as paying and increasing a dividend every year for 20 years in this case) has produced a positive total return for investors of 6.8% (on a NAV basis) over the past 12 months, besting cash, value, growth and all other indexes. And this index hasn't just produced a favorable performance for investors in 2018.
For the past 10 years, dividend stocks have proven their worth. The ETF has produced a total annualized gain for investors of 14.7%. Growth has chalked up a slightly better performance, rising 16.9%, although dividends have outperformed growth on a five- and three-year horizon.
Only time will tell if the current selloff is just a blip or the start of something bigger, but based on the data above, if it is the start of something bigger, dividends have already shown that they are the best place to invest to protect your cash. I think this is going to continue.
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