Sensing the end of Fed hikes, some investors are returning to dividend stocks

NEW YORK, July 25 (Reuters) – Some investors are taking a second look at the shares of dividend-rich companies as expectations grow that the Federal Reserve is nearing the end of a rate-hiking cycle that has lifted bond yields to their highest levels in nearly two decades.

The Fed’s most aggressive rate hikes in a generation have pushed short-term Treasury yields above 5%, the highest level since 2007, expanding opportunities for income-seeking investors after a decade marked by historically low interest rates. That has helped pressure many of the market’s popular dividend-paying stocks, which investors had turned to when rates were far lower.

With markets betting the Fed is unlikely to raise interest rates much longer, some investors say dividend-paying stocks are starting to look appealing again, as they look for opportunities for income if Treasuries fall.

“The 5% you get from Treasuries looks to be transitory and it will take some pressure off these sectors competing for yield,” said Jurrien Timmer, director of global macro at Fidelity Investments. “The dividend-paying value side of the market is a pretty compelling place to go to maintain that yield.”

A nascent resurgence of interest in dividend-paying stocks can be seen in the $11.7 billion ProShares S&P 500 Dividend Aristocrats ETF ( NOBL.Z ), which brought in $33 million in net inflows in the two weeks ended July 19, the biggest two-week gain since January, according to Lipper.

The fund, which tracks companies that have raised dividends annually over the past 25 years, is up about 7.5% this year, compared with a nearly 19% gain for the S&P 500.

Meanwhile, 44% of global fund managers polled by BoFA Global Research said they now expect high-yielding stocks to outperform low-yielding ones, up nine percentage points from last month.

Timmer is increasingly focusing on financials and energy stocks, betting that both sectors will benefit from what he expects will be an economic soft landing that precedes a painful recession.

Overall, S&P 500 companies have been less generous to investors this year, a trend driven in part by lower oil prices forcing energy companies to cut payouts, according to Howard Silverblatt, senior index analyst, product management, for S&P Dow Jones Indices.

Companies have increased their payouts by an average of 9.1% so far in 2023, compared with 11.8% at the same time last year, while 14 companies have either suspended or lowered dividends since the start of the year, up from four a year ago, the firm’s data showed.

Still, investors are looking to dividend-paying stocks as a source of total return this year in anticipation that bond yields may wobble while stocks continue to rise, Silverblatt said.

“If you’re going into dividend-paying stocks now, you’re taking that risk because you think the market is likely to go up,” he said.

Another reason for dividend payers’ appeal is an extension of the market’s rally from the cluster of huge tech and growth stocks that led gains for most of the year to other areas. The S&P 500 energy and financials sectors are up 5.7% and 5.6%, respectively, this month, compared with a 2.5% gain for the broader index.

“If the belief in a recession fades a little bit, there’s more air cover to extend the market to some of these dividend payers that hadn’t really participated in the rally until a few weeks ago,” said Cliff Corso, chief investment officer at Advisors Asset Management. “We see the trend continuing as the Fed approaches its final stop point.”

Corso searches for dividend-paying companies in cyclical sectors such as financials, where valuations are more reasonable.

Still, some investors are skeptical that an economic soft landing will be particularly beneficial for dividend payers. Bryant VanCronkhite, a portfolio manager at Allspring Global Investments, looks for companies seeking to increase revenue through acquisitions, which he considers a better use of capital than returning dividends to shareholders.

“We’re looking for companies that may not have the highest returns, but the capacity to increase returns down the line” because of their larger earnings base, he said.

Reporting by David Randall; Editing by Ira Iosebashvili

Our standards: Thomson Reuters Trust Principles.