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

NEW YORK (Reuters) – Some investors are giving a second look at dividend-rich stocks as expectations grow that the Federal Reserve is nearing the end of a cycle of rate hikes that have lifted bond yields to their highest level in nearly two decades.

More serious interest rate increases by the Federal Reserve have pushed short-term Treasury yields above 5%, their highest level since 2007, widening options for income-seeking investors after a decade marked by historically low rates. This helped put pressure on many of the popular dividend-paying stocks in the market, which investors turned to when prices were much lower.

With markets betting that the Fed is unlikely to raise interest rates much further, some investors say dividend payer stocks are starting to look attractive again, as they look for income opportunities if Treasury yields turn lower.

“It appears that the five percent you’re getting in Treasuries is temporary, and that will take some of the pressure off these sectors competing for yield,” said Goren Timmer, global macro director at Fidelity Investments. “The dividend value side of the market is a very compelling place to go to maintain that yield.”

Renewed interest in the dividend-paying stock can be seen in inflows to the $11.7 billion ProShares S&P 500 Dividend Aristocrats ETF (NOBL.Z), which brought in $33 million in net inflows over the two weeks ended July 19, its biggest gain in two weeks since January, according to Lieber data.

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

Meanwhile, 44% of global fund managers polled by BoFA Global Research said they now expect high-dividend stocks to outperform those paying low dividends, up nine percentage points from the previous month.

Timmer is increasingly focused on financial stocks and energy, and is betting that both sectors will benefit from what he expects to be a soft economic landing that averts a painful recession.

In general, S&P 500 companies have been less generous to investors this year, a trend driven in part by lower oil prices that have forced energy companies to cut payments, according to Howard Silverblatt, senior index analyst, product management, for S&P Dow Jones Indexes.

The company’s data showed that companies have increased their payments by an average of 9.1% so far in 2023, compared to 11.8% at the same time last year, while 14 companies have suspended or reduced their profits since the beginning of the year, up from four a year ago.

However, investors are seeking dividend-paying stocks as a source of total return this year, Silverblatt said, waiting for bond yields to falter while stocks continue to rally.

“If you now intend to pay a dividend, you’re taking a risk because you think there is a high potential for the market to go up,” he said.

Another reason for the appeal to dividend payers is the broadening of the market’s recovery from the behemoth group of technology and growth stocks that have led gains for most of the year to other regions. The energy and financials sectors of the S&P 500 are up 5.7% and 5.6% this month, respectively, compared to a 2.5% increase for the broader index.

“If that belief in recession fades a bit, there will be more air cover to expand the market to some dividend payers who weren’t really involved in the rally until a few weeks ago,” said Cliff Corso, chief investment officer at Advisors Asset Management. “We see this trend continuing as the Fed approaches its final stopping point.”

Corso looks for dividend-paying companies in cyclical sectors such as financials, where valuations are less expensive.

However, some investors remain skeptical that an economic soft landing would be particularly beneficial to dividend payers. Bryant VanCronkhite, a portfolio manager at Allspring Global Investments, looks at companies seeking to increase revenue through acquisitions, which he views as a better use of capital rather than returning dividends to shareholders.

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

(Reporting by David Randall). Editing by Ira Yosibashvili

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