Sensing end of Fed hikes, some investors return to dividend stocks

Sensing end of Fed hikes, some investors return to dividend stocks

Investors are reconsidering dividend-rich companies as the Federal Reserve approaches the end of its rate-hiking cycle, which has led to high bond yields. The aggressive rate increases have caused short-term Treasury yields to surpass 5%, the highest level since 2007. This has put pressure on dividend-paying stocks, which were popular when rates were lower. However, with expectations that the Fed won’t raise rates much further, some investors see dividend payers as attractive again, especially if Treasury yields decrease.

Jurrien Timmer, director of global macro at Fidelity Investments, believes that the 5% yield from Treasuries is temporary, which will relieve pressure on sectors competing for yield. He sees dividend-paying stocks as a compelling option to maintain returns. This sentiment is reflected in the inflows to the ProShares S&P 500 Dividend Aristocrats ETF, which gained $33 million in net inflows over two weeks, the largest gain since January.

The ProShares ETF tracks companies that have increased dividends annually for the past 25 years and has performed well this year, up around 7.5%. In contrast, the S&P 500 has gained nearly 19%. Additionally, a survey by BoFA Global Research found that 44% of global fund managers expect high-dividend stocks to outperform low-dividend stocks, a nine percentage-point increase from the previous month.

Timmer is focusing on financial and energy stocks, anticipating that both sectors will benefit from an economic soft landing without a recession. However, S&P 500 companies have been less generous to investors this year, with lower oil prices leading energy companies to reduce payouts. Companies have increased their dividends by an average of 9.1% in 2023, compared to 11.8% last year. Furthermore, 14 companies have either suspended or lowered their dividends this year, up from four in the previous year.

Despite these challenges, investors are still seeking dividend-paying stocks for total return, as they anticipate bond yields to weaken while stocks continue to rise. This trend is driven by a broadening of the market rally beyond tech and growth stocks. The energy and financial sectors of the S&P 500 have performed well this month, with gains of 5.7% and 5.6%, respectively, compared to a 2.5% gain for the broader index.

Cliff Corso, chief investment officer at Advisors Asset Management, believes that if the belief in a recession diminishes, there will be more room for dividend payers to participate in the market rally. He expects this trend to continue as the Fed approaches the end of its rate-hiking cycle. Corso is specifically looking for dividend-paying companies in cyclical sectors like financials, where valuations are more attractive.

However, not all investors are convinced that an economic soft landing would benefit dividend-payers. Bryant VanCronkhite, a portfolio manager at Allspring Global Investments, is seeking companies that aim to grow revenues through acquisitions, which he considers a better use of capital than returning dividends to shareholders. He looks for companies with the capacity to increase yields in the future due to their larger earnings base.

In conclusion, investors are reevaluating dividend-rich companies as the Fed nears the end of its rate-hiking cycle. The expectation of lower bond yields has made dividend payers more appealing. While some investors are optimistic about the performance of dividend-paying stocks, others are looking for companies with growth potential. The market rally is expanding beyond tech and growth stocks, benefiting sectors like energy and financials. Overall, the outlook for dividend-paying stocks remains positive as investors seek total return opportunities.

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

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