Equity income investing:
A strategy for unpredictable markets

Unpredictability has become the new normal – in life and in the markets. Many investors are wondering where they can find the growth they need for their long-term goals, along with some measure of stability.

Through broad exposure to the investment characteristics and different sectors of the S&P Index with emphasis on higher dividend paying stocks; equity income investing may offer a compelling way to combat current market forces and add ballast to portfolios.

Dividends: An important component of total return

The historically superior long-term returns of stocks come not just from price growth, but also from the dividends that many companies pay to their shareholders. Reinvesting those dividends allows investors to purchase more shares, which can help their assets grow faster.

As the chart below illustrates, 43% of the total return of stocks since 1996 has been due to the compounding effect of reinvested dividends.

Sources: FactSet, Mellon Investments Corporation. June 30, 2020 Past performance is no guarantee of future results. Charts provided are for illustrative purposes only and are not indicative of the past or future performance of any BNY Mellon product. >Dividends make up a significant part of S&P 500’s total return (43%). The S&P has risen 700% since January 1996.

Equity income in a low yield environment

The Federal Reserve and other central banks have taken unprecedented steps to provide monetary stimulus in response to the Covid-19 pandemic1. This has driven fixed income yields, which had been low for a number of years, close to zero. Many market watchers expect yields to stay “lower for longer.”2

As a result, equity dividend yields have grown increasingly attractive relative to bonds.

Sources: FactSet, Mellon Investments Corporation. June 30, 2020 Past performance is no guarantee of future results. Charts provided are for illustrative purposes only and are not indicative of the past or future performance of any BNY Mellon product.

The Standard & Poor's 500 (S&P 500) Composite Stock Price Index is a widely accepted, unmanaged index of U.S. stock market performance.

The Barclays U.S. Aggregate Index is a widely accepted, unmanaged total return index of corporate, government and government-agency debt instruments, mortgage-backed securities and asset-backed securities with an average maturity of 1-10 years.

Investors cannot invest directly in an index.

In addition, equity income has provided better inflation protection than traditional government and corporate bonds over time3. With government spending on the rise and likely to stay high, it is critical to protect purchasing power.

Dividend-paying stocks have offered stability in falling markets

High-dividend stocks can lag during strong up markets, but they have held up better in most down markets. For example, they lagged broadly in 1999, but came back strongly in 2000 and 2001. When the market declined again in 2002, the top dividend payers limited losses.

Not all dividend payers are equal

However, equity income investing is not a matter of simply buying the highest-dividend stocks. Such a strategy can lead to unintended consequences, including:

* Excessive sector concentration, or benchmark risk: Choosing the highest dividend payers could cause a portfolio to have significantly different industry weightings than the S&P 500 Index. For example, a portfolio made up of high dividend paying stocks would have be overweight to certain sectors and underweight to others, relative to the Index, as of March 31, 2020:4

Underweight Overweight
Consumer Discretionary Consumer Staples
Health Care Utilities
Information Technology Energy
Industrials Real Estate

* A greater probability of dividend cuts: High-dividend stocks often cut their dividends during times of economic difficulty. The chart below shows how high dividend payers have tended to overpromise and underdeliver. The undiscerning investor could be left with a much lower yield than they expected.

Sources: FactSet, Mellon Investments Corporation. June 30, 2020 Past performance is no guarantee of future results. Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon product.

BNY Mellon Equity Income Fund: An active, disciplined approach

We believe that investors should not seek out companies just because they issue a dividend – nor should they always avoid those who have cut or suspended their dividends. Our process seeks to identify sustainable dividend payers that we believe have the best long-term prospects.

The BNY Mellon Equity Income Fund seeks to:

  • Participate in growth when markets are rising
  • Help Manage risk by diversifying across companies and industries
  • Navigate changes in interest rates
  • Deliver attractive risk-adjusted performance

The Fund is typically invested in every sector of the market in an effort to avoid unintended consequences or sector weights.

The Mellon approach to equity income

As sub-adviser to the BNY Mellon Equity Income Fund, we bring more than 80 years of experience and an institutional pedigree that is built on seeking low-volatility investment opportunities. We are differentiated by:

  • The depth and experience of our investment team
  • A strong commitment to research
  • Forward-looking, fundamental analysis
  • Tactical asset allocation across diverse sources of performance with low historical correlation
  • Fully integrated risk management throughout the process

Our disciplined process focuses on sustainable dividend yield and strong fundamentals, and is designed to seek to lead to repeatable outcomes.

Learn more
With all the unpredictability in the world, investors need a strategy for seeking growth while managing risk. The BNY Mellon Equity Income Fund seeks to deliver total return consisting of capital appreciation and income by investing in dividend-paying stocks.

To learn more about the Fund, and where it may fit in your portfolio, call us at 1-800-896-8285 or visit bnymellonim.com/us.

1Brookings, “What’s the Fed doing in response to the COVID-19 crisis? What more could it do?” Jeffrey Cheng, David Skidmore, and David Wessel, July 17, 2020.

2Euler Hermes, “Lower for longer: Covid-19 to weigh on interest rates,” May 14, 2020.

3Source: Money Matters, Summer 2020, “Why Equity Income Still Makes Sense,” Newton Investment Management.

4Source: FactSet, Mellon Investments Corporation. As of March 31, 2020.

The Standard & Poor's 500 (S&P 500) Composite Stock Price Index is a widely accepted, unmanaged index of U.S. stock market performance.

The Barclays U.S. Aggregate Index is a widely accepted, unmanaged total return index of corporate, government and government-agency debt instruments, mortgage-backed securities and asset-backed securities with an average maturity of 1-10 years.

Investors cannot invest directly in an index.

 

Investors should consider the investment objectives, risks, charges, and expenses of any mutual fund carefully before investing. Download a prospectus, or a summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing. Investors should discuss with their financial professional the eligibility requirements for Class I and Y shares, which are available only to certain eligible investors and the historical results achieved by the fund’s respective share class.

Risks:

All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees.

Asset allocation and diversification cannot assure a profit or protect against loss.

This material has been distributed for informational purposes only. It is educational in nature and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this communication and subject to change. Forecasts, estimates and certain information contained herein are based upon proprietary research and are subject to change without notice. Certain information has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

Mellon is a global multi-specialist investment manager dedicated to serving our clients with a full spectrum of research-driven solutions. Mellon Investments Corporation (Mellon) is a registered investment adviser and an indirect subsidiary of The Bank of New York Mellon Corporation.

BNY Mellon Investment Advisor, Inc., Mellon Investments Corporation, (the fund’s sub-advisor), and BNY Mellon Securities Corporation are subsidiaries of The Bank of New York Mellon Corporation.

BNY Mellon Retail Services is a division of BNY Mellon Securities Corporation.

©2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich St., New York, NY 10286.

MARK-135373-2020-08-12