With inflation raging and the Federal Reserve preparing to raise interest rates, dividend stocks may act as a buoyant safe haven for investors.
So it’s no wonder that the S&P 500 High Yield Dividend Index, which includes the 80 biggest dividend payers, generated a total return of 2.6% year to date through Monday, compared to a 5.8% negative return for the S&P 500 as a whole, the Wall Street Journal reports.
"As a total return manager, we do look for capital appreciation when markets are doing well and rely on income from dividends to help when markets become volatile or negative," Ryan Fause, a portfolio manager at Pinnacle Associates, told Reuters.
Stock dividend funds saw a record inflow of $7.5 billion in January, according to Refinitiv Lipper, as cited by The Journal.
“In this environment, a good place to hide would be some of these dividend-oriented companies that are going to grind through this market turbulence,” Sandy Villere, a portfolio manager at wealth management firm Villere, told the paper.
When you’re choosing dividend stocks, you don’t want to simply opt for those with the highest yield. A high yield might be created by a low share price that’s low because the company has problems. You’ll generally do well with companies that regularly raise their dividends, as it’s generally strong finances that allow them to do so.
A quality dividend “isn’t only sustainable but preferably can grow over time,” Mike Barclay, a senior portfolio manager at Columbia Threadneedle Investments, told Barron’s. “It’s one of the reasons we don’t focus on yield.”
Steve Goddard, chief investment officer of money manager London Co., agrees with the focus on quality.
“High return-on-capital companies usually by definition will generate a lot more free cash flow than the average company would,” he told Barron’s. And, of course, cash flow finances dividends.
One place to go for quality companies is the S&P 500 Dividend Aristocrats Index, which houses 65 companies that have increased their dividend for at least 25 years. You can get them in the S&P 500 Dividend Aristocrats ETF (NOBL).
The fund’s biggest holding is steelmaker Nucor (NUE), followed by food-processing company Archer-Daniels-Midland (ADM), bank People’s United Financial (PBCT), oil company Exxon Mobil (XOM), spice company McCormick (MKC), drug maker AbbVie (ABBV), insurer Aflac (AFL), oil company Chevron (CVX), chemical company Albemarle (ALB) and healthcare services company Cardinal Health (CAH).
Many dividend payers are found in the banking and energy industries. And a lot of dividend payers are value companies, which have outperformed growth companies in recent months.
Over the past three months, the Russell 1000 Value index has firmed 0.1%, compared to an 8% drop for the Russell 100 Growth index.
"As we see growth stocks struggle and prevailing interest rates still somewhat low, we do find comfort in owning dividend stocks as a core part of most portfolios,” Pinnacle’s Fause told Reuters.
