Mark Barnes,PhD,
Indhu Raghavan
- US equities had a stellar 2023 and outshone peers. But, the US was also a factor outlier among regions, with most US factors lagging their benchmark. In particular, Dividend Yield steeply underperformed.
- Technology and Discretionary drove US equity returns in 2023. They also had the lowest proportion of dividend-paying stocks and the lowest average dividend yields.
- It is important to understand index characteristics beyond the index aggregates. In 2023, if investors had chased mega-cap growth, they would have missed out on income, and if they had chased dividend yield, they would have missed out on mega-cap-growth.
US equities had a stellar 2023 and outshone peers, coming in close to top of the league tables in local currency terms. However, not all investment objectives would have been served by exposure to US equities.
As our recently released Equity Factor Insights report discusses, US factor performance in 2023 stood out from its peers, but not in a good way. Exhibit 1 shows the relative return of regional equity factors to their benchmarks for 2023 in local currency terms. The US was a factor outlier among regions, where all but the Quality factor underperformed. In particular, US Dividend Yield steeply underperformed its benchmark relative to peers.
Exhibit 1: Global equity factor performance relative to benchmark, 2023 (LC, %)
Source: FTSE Russell and LSEG, as of December 31, 2023. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures.
What happened to dividend yield?
To understand why Yield lagged so badly, we first consider what contributed to returns at the industry level. Exhibit 2 illustrates industry contribution to regional equity market performance in 2023, combining the industry’s weight within the index and its return for the period. On average, Technology, Discretionary, Industrials and Financials led contributions, even as most industries contributed positively in most regions.
What is hard to miss is the long dark blue bar that shows Technology’s contribution in the US. Technology drove nearly two-thirds of FTSE USA’s return, or 17.0%-pts of the benchmark’s 27.1% return. Discretionary was a distant second with a 5.1%-pts contribution, which is still substantial. Industrials and Financials also pitched in notably.
Exhibit 2: ICB Industry-weighted contributions to regional benchmarks, 2023 (LC, %)
| US | UK | Europe ex UK | Japan | APac ex JP | |
|---|---|---|---|---|---|
| 2023 Total Return (%) | 27.1 | 9 | 17.3 | 28.2 | 11.3 |
Source: FTSE Russell and LSEG, as of December 31, 2023. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures.
Dividend yield in the backseat
We then examine how this industry performance related to the index’s dividend yield.
Looking simply at the top ten names in the FTSE USA index by benchmark weight (combining Alphabet’s two share classes) and their dividend yields, only six paid any dividend in 2023 (Exhibit 3). This statistic falls to three out of seven for the Magnificent Seven stocks (top 7 in this list), all of which are in Technology and Discretionary.
Exhibit 3: Top 10 names* by weight in the FTSE USA index
| Rank | Name | Weight (%) | ICB Industry | Div. Yield (%) |
|---|---|---|---|---|
| 1 | Apple Inc. | 6.86 | Technology | 0.5 |
| 2 | Microsoft Corp | 6.76 | Technology | 0.8 |
| 3 | Alphabet* | 3.72 | Technology | 0 |
| 4 | Amazon.Com | 3.31 | Consumer Discretionary | 0 |
| 5 | Nvidia | 2.84 | Technology | 0.03 |
| 6 | Meta Platforms Inc | 1.89 | Technology | 0 |
| 7 | Tesla | 1.66 | Consumer Discretionary | 0 |
| 8 | Lilly (Eli) & Co | 1.19 | Health Care | 0.78 |
| 9 | JPMorgan Chase & Co | 1.19 | Financials | 2.47 |
| 10 | Unitedhealth Group | 1.18 | Health Care | 1.43 |
Exhibit 4: Share of FTSE USA industry weight not paying dividends, by industry
Source: FTSE Russell and LSEG, as of December 31, 2023. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures.
Even when Technology and Discretionary stocks paid dividends, their yield was low. Exhibit 5 shows the weighted-average dividend yield for FTSE USA industries by two measures—considering only dividend payers in each industry and considering all names within an industry. Technology and Discretionary ranked among the bottom three, together with Industrials, for the average dividend yield paid by dividend payers, and as the bottom two if we include non-dividend-payers as well.
The combination of Technology’s and Discretionary’s lower proportion of dividend payers and low dividend yield among payers, relative to other industries, means that their stellar performance and contribution to the index undermined the Dividend Yield factor’s relative performance.
Said differently, the real leaders of recent US equity market performance were not leaders in terms of yield.
Exhibit 5: Dividend Yield of FTSE USA, by industry, for all stocks and only stocks paying dividends, 2023
Source: FTSE Russell and LSEG, as of December 31, 2023. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures.
It is well-known that the US benchmark’s dividend yield is low relative to its international peers (exhibit 6). This is due to its starkly different industry exposures and those industries’ dividend yield characteristics.
Exhibit 6: Dividend yield ( %)
Source: FTSE Russell and LSEG, as of December 31, 2023. Past performance is no guarantee of future results. Please see the end of this presentation for important legal disclosures.
It is important to understand return composition beyond headline numbers, and index characteristics beyond the index aggregates. In 2023, if investors had chased mega-cap growth, they would have missed out on income, and if they had chased dividend yield, they would have missed out on mega-cap-growth.
The FTSE Russell indices mentioned in this insight were FTSE USA, FTSE UK, FTSE Developed Europe ex UK, FTSE Japan, FTSE Developed Asia Pacific ex Japan, and FTSE Emerging.
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