Anticipating the End of Fed Hikes, Certain Investors Revert to Dividend Stocks

Anticipating the End of Fed Hikes, Certain Investors Revert to DiL Stocks
Anticipating the End of Fed Hikes, Certain Investors Revert to DiL Stocks (Image Source: reuters.com)

Fresh Perspective on Dividend Stocks as Federal Reserve Hike Cycle Nears Completion


In the wake of mounting expectations that the Federal Reserve is on the verge of concluding its rate-hiking cycle, certain investors are reevaluating dividend-rich companies' stocks. 


The Federal Reserve's aggressive series of rate increases, the most robust in a generation, has propelled short-term Treasury yields to their highest point since 2007, creating broader opportunities for income-seeking investors. 


This development comes after a decade defined by historically low interest rates. Consequently, many of the market's favored dividend-paying stocks faced pressure as investors sought refuge during the lower-rate era.


However, with the market's prevailing belief that the Federal Reserve is unlikely to pursue further significant rate hikes, some investors now find dividend-paying stocks increasingly attractive again. The appeal lies in the quest for income opportunities, especially if Treasury yields are expected to decline.


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Jurrien Timmer, director of global macro at Fidelity Investments, emphasizes the shifting landscape, stating, "The 5% you're getting from Treasuries looks to be transitory and that will take some pressure off of these sectors competing for yield. The dividend-paying value side of the market is a pretty compelling place to go to maintain that return."


As the era of steadily increasing interest rates draws to a close, investors are adapting their strategies, looking to capitalize on potential income streams in the context of evolving market dynamics.


An emerging trend of renewed enthusiasm for dividend-paying stocks is evident in the recent inflows to the ProShares S&P 500 Dividend Aristocrats ETF (NOBL.Z), a fund with assets totaling $11.7 billion. 

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According to Lipper data, the ETF experienced a substantial increase of $33 million in net inflows over the two-week period that concluded on July 19. 


Notably, this marked the largest two-week surge since January, signaling a growing interest in such investments.


The NOBL.Z ETF is specifically designed to track companies that boast a remarkable track record of consistently increasing dividends annually for the past 25 years. 


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As a result of this focused approach, the fund has performed admirably, recording an impressive growth of approximately 7.5% so far this year. 


This stands in comparison to the broader S&P 500, which has achieved a respectable gain of nearly 19% over the same period.


In light of these positive developments, investors seem to be recognizing the potential benefits and stability that dividend-paying stocks can bring to their portfolios, leading to a shift in investment preferences towards this type of equity.


Meanwhile, a recent survey conducted by BoFA Global Research revealed that 44% of global fund managers hold the belief that high-dividend stocks will outperform those with lower dividend yields. 


This marks a notable increase of nine percentage points compared to the previous month's findings.


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In light of this market sentiment, Timmer, a prominent investor, has been progressively directing his attention towards financial and energy stocks. 


His rationale lies in the anticipation that both sectors will benefit from what he foresees as an economic soft landing, avoiding the pain of a recession.


Throughout the year, S&P 500 companies have shown a trend of being less generous to their investors. This shift can be partly attributed to the impact of lower oil prices, which has led energy companies to reduce their dividend payouts. 


Howard Silverblatt, a senior index analyst responsible for product management at S&P Dow Jones Indices, points to this contributing factor behind the overall decline in dividend generosity among these companies.


In 2023, corporations have seen a moderate rise in their dividend payouts, averaging 9.1%, which is slightly lower than the 11.8% increase observed during the same period the previous year. 


Surprisingly, the data from the firm revealed that 14 companies opted to either reduce or completely halt their dividends since the beginning of this year, a significant increase compared to only four companies taking similar actions in the previous year.


However, despite this trend, investors are actively seeking out dividend-paying stocks as an attractive option for generating total return. 


The prevailing belief is that bond yields might experience a downturn, while the upward trajectory of the stock market continues. 


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Silverblatt, an expert in the field, has noted this intriguing shift in investor behavior as they place their confidence in dividend stocks to secure their financial growth this year.


According to one financial expert, venturing into dividend-paying stocks at this point involves embracing a certain level of risk, driven by the belief in a high likelihood of market upswing.


The allure of dividend stocks is further bolstered by the market's shifting dynamics, transitioning away from the domination of massive tech and growth stocks that previously spearheaded gains throughout the year. 


Instead, the focus has now broadened to encompass other sectors. For instance, the S&P 500 energy and financials sectors have seen notable surges, registering gains of 5.7% and 5.6% respectively, just this month. In comparison, the broader index recorded a 2.5% increase.


"Amidst the prospect of a receding recession outlook, investors are finding opportunities to diversify their portfolios by re-exploring dividend-paying stocks that had remained on the sidelines until recent weeks," stated Cliff Corso, the Chief Investment Officer at Advisors Asset Management. 


As the Federal Reserve approaches its eventual halt in rate hikes, there is a growing sense of security in broadening market exposure to these dividend stocks.


Cliff Corso's investment strategy revolves around identifying dividend-paying companies in cyclical sectors, particularly in financials, where valuations are more affordable, providing a promising ground for potential returns.


However, not all investors share the same enthusiasm for dividend-payers under the assumption of an economic soft landing. 


Bryant VanCronkhite, a portfolio manager at Allspring Global Investments, takes a different approach, seeking out companies with a focus on revenue growth through strategic acquisitions. 


He believes this serves as a better capital allocation method than distributing dividends to shareholders.

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"We prioritize companies that may not boast the highest yield presently but exhibit the capacity to enhance yields in the future," VanCronkhite remarked, emphasizing the significance of a strong earnings base to fuel sustainable dividend growth."


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