Published on July 25, 2023 at 12:19
NEW YORK, July 25 (Reuters) – Some investors are regaining interest in high dividend-paying stocks, as expectations of an end to rate hikes by the U.S. Federal Reserve (Fed) become more prevalent.
Fed rate hikes have pushed short-term Treasury yields above 5%, their highest level since 2007, making high dividend stocks less attractive as they were favored by investors when rates were low and there were few alternatives to generate yield.
Markets are now betting that the Fed is unlikely to raise rates further, allowing high dividend stocks to regain interest, according to some investors.
“The 5% you get on Treasuries is transitory, which will reduce pressure on other assets today competing to offer comparable yield,” says Jurrien Timmer, Director of Global Macro at Fidelity Investments.
A renewed interest in high dividend stocks can be seen in the inflows of the ProShares S&P 500 Dividend Aristocrats ETF, totaling $11.7 billion in assets, which recorded net inflows of $33 million in the two weeks ended July 19, its largest gain over that period since January, according to Lipper data.
The fund, which exposes itself to companies that have regularly increased their dividends over the past 25 years, has achieved a performance of approximately 7.5% this year, compared to nearly 19% for the S&P 500.
Furthermore, 44% of managers surveyed by BoFA Global Research now expect high dividend stocks to outperform low dividend stocks, an increase of nine percentage points from the previous month.
Jurrien Timmer is increasingly favoring financial and energy stocks, betting on a soft landing of the economy favorable to these two sectors.
Overall, S&P 500 companies have been less generous with investors this year, a trend linked in particular to the decline in oil prices, which has reduced dividends for energy sector companies, according to Howard Silverblatt, analyst at S&P Dow Jones Indices.
Companies have increased their dividends by an average of 9.1% in 2023, compared to 11.8% at the same time last year, while 14 companies have suspended or reduced their dividends since the beginning of the year, compared to four a year ago, according to data from S&P Dow Jones Indices.
However, investors are still exposing themselves to high dividend stocks, betting on a scenario of weakening bond yields and further stock market gains, adds Howard Silverblatt.
“If you buy dividend stocks now, you are taking this risk because you think there is a high probability that the market will rise,” he summarizes.
A broader recovery in the stock markets, which are no longer only led by large technology and growth stocks, is another argument in favor of these stocks.
The energy and finance sectors of the S&P 500 have risen by 5.7% and 5.6% respectively this month, compared to 2.5% for the index.
“If the prospects of a recession fade a bit, the rebound could extend to some of these high dividend stocks that had not really participated in the rally until a few weeks ago,” notes Cliff Corso, Chief Investment Officer at Advisors Asset Management.
“We believe this trend will continue as the Fed approaches its peak rate.”
Cliff Corso is looking for companies that pay dividends in cyclical sectors, such as financial services, where valuations are cheaper.
However, some investors doubt that a soft landing of the economy will be beneficial to dividend holders.
Bryant VanCronkhite, Portfolio Manager at Allspring Global Investments, favors companies that seek to increase their revenue through acquisitions, a better use of capital than paying dividends to shareholders according to him.
“We are looking for companies that may not have the highest yield, but have the ability to increase returns in the long term” due to their larger revenue base, he explains. (Reporting by David Randall, French version by Corentin Chappron, edited by Kate Entringer)
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