Why Dividend Stocks Have Underperformed This Year

The performance of the Utilities SPDR ETF (XLU) and the Vanguard REIT ETF (VNQ), which are two of the highest-dividend–paying sectors. In 2011, XLU and VNQ gave returns of 19.1% and 6.7%, respectively, compared to the -1.2% of S&P 500. In 2011, we saw a steep dip in interest rates as the Fed bought Treasuries aggressively. The ten-year Treasury (IEF) yield dipped by a whopping 150 basis points in 2011.

The two ETFs gave decent returns in 2012, when interest rates stayed put. 2013 saw a rise in interest rates as the Fed contemplated tapering its bond-buying program, which led to muted returns by the two ETFs. The S&P 500 gained close to 30%. Last year, though, the yield on the ten-year fell by ~80 basis points. XLU gained 30.88%, while VNQ grew by 30.4% in 2014. The S&P 500 gained ~12% in 2014. This year, both XLU and VNQ have given negative returns due to the looming rate hike, while the broader index has been more or less flat. As you can see, these sectors have performed well when interest rates have fallen and have underperformed when rates rise.

Source: Market Realist

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