Dividend stocks were largely ignored over the past couple years, as investors focused on hot growth stocks, such as the mega-cap technology firms.
But with the Federal Reserve poised to raise interest rates multiple times this year, dividend stocks may command more attention. Strong corporate earnings are enabling companies to make juicy dividend payments.
S&P Dow Jones Indices, as cited by CNBC, estimates dividend payouts will total a record $541 billion this year, up 6% from 2021, which also set an all-time high. And 17 of the 125 or so S&P 500 companies that have reported fourth-quarter earnings so far also have raised their dividends, according to CNBC.
“When companies increase their dividends, … it is a sign of confidence in future cash flows,” Simeon Hyman, who manages the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) - Get ProShares S&P 500 Dividend Aristocrats ETF Report, told CNBC.
The investing environment is shaping up to be a good one for dividend stocks this year, experts say. “A combination of slowing earnings growth and a relatively full multiple [for stocks overall] should make the case for dividends as a good way to go for investors,” Tom Huber, a money manager of T. Rowe Price Dividend Growth Fund (PRDGX) - Get T. Rowe Price Dividend Growth Report, told Barron’s.
The S&P 500 price-earnings ratio based on trailing 12-month earnings recently stood at 24.97.
There are three basic strategies for investing in dividend stocks. One is seeking stocks with the highest yields. But high yields can signal a troubled company, as the yield may be high because the stock fell amid worries about the company’s performance.
Another strategy is to invest in companies that regularly raise their dividends. Of course that could lead to a portfolio of low-yielding stocks. So the final strategy would be to mix the first two: find stocks with a dividend yield that is above average and where the companies are strong enough to raise their dividends.
The dividend yield for the S&P 500 as a whole recently stood at 1.38%. In recent years, companies have focused more on stock buybacks than dividends. Just 22% of corporate cash flow went to dividends in the third quarter, compared to 39% for buybacks, according to S&P Dow Jones.
But now that may change. The drop in stocks during recent weeks has made investors nervous, and it may make them more eager for the reliable payouts of dividend stocks. The S&P 500 has lost 8.5% so far this year.
“With all the volatility, cash in hand has become what matters to a lot of investors,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told CNBC.
“Dividends don’t matter as much if you’re making 20% price returns,” he said. “But if you are only expecting a price return in the low single digits for stocks this year, or even a down year, a 2% or 3% dividend will matter a lot.”
Morningstar market strategist Dave Sekera says there are still a few companies that need to lift their dividends to return the percentage of earnings they devote to dividends back to where it was before the pandemic. “But really, what I would expect this year is more for dividends to grow in line with earnings,” he said in an interview on Morningstar’s web site.