Shares of companies that offer steady payments could be back in the good graces of investors this year.
Dividend stocks fell out of favor in 2023, even as all three major US indexes overcame regional banking turmoil, high interest rates and geopolitical tensions to notch double-digit returns.
As interest rates rose to a 22-year high, investors favored bonds at attractive yields over riskier stocks offering smaller payouts. Artificial intelligence hype also drove investors into mega-cap tech stocks, while the rest of the market lagged behind.
The S&P 500 Dividend Aristocrats index, which measures the performance of companies that have increased their dividend payments in each of the last 25 years, rose 5.7% last year compared to the S&P 500 total return index's 26% gain.
That was a reversal from 2022, when the dividend index outperformed the benchmark total return index as investors fearful of the Federal Reserve's interest rate hikes sought income-paying stock havens.
Some traders believe that dividend stocks could make a comeback this year. Yields swooned in late 2023 and could continue ticking lower if the Fed cuts interest rates.
"Investors are seeking durable, higher yielding dividends as market volatility is expected to continue throughout the easing cycle," wrote Morgan Stanley strategists in a Monday note.
Larry Adam, chief investment officer at Raymond James, favors dividend stocks in sectors like tech and healthcare for their growth qualities, over traditionally defensive categories like utilities. His firm only invests in dividend stocks that have that growth component, he says.
"We look for not only good valuations, but the ability to keep it up," said Adam.
Investors tend to reward companies when they raise their dividends. Lennar shares are up more than 6% this week after the home construction firm on Tuesday hiked its annual dividend to $2 per share from $1.50 and raised share buybacks by $5 billion.
Mastercard on Dec. 5 said that its board had approved raising its quarterly dividend to 66 cents a share from 57 cents and a new share repurchase plan up to $11 billion. Shares of Mastercard have since gained about 5%.
Companies in the Russell 1000 index that raised their dividends saw their stock prices outperform by 3.1% on average in the six months following the announcement of the increase, according to Morgan Stanley data going back to 2014. Those that lowered their dividends saw their stock prices underperform by 4.7% during that same period.
Of course, it's not guaranteed that bond yields will see a smooth decline. Yields edged up to start the month, helping send stocks lower, and the market could continue seeing some volatility this year as investors recalibrate their rate expectations.
Wall Street currently expects the Fed to cut rates seven times this year, according to the CME FedWatch Tool, while the central bank has only penciled in three cuts.
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