Good Fishing In The Dividend Stream
Summary
- Once upon a time, dividends played a starring role in equity markets—until 14 years of easy money whetted investors’ appetite for risk and created a massive tailwind for unprofitable, long-duration growth stocks.
- Valuations appear to be attractive: Stocks yielding north of 2.5% are trading near their largest discount to the equity market in recent memory.
- Dividend payments tend to be less volatile than earnings-multiple expansions and contractions, providing a relatively steady return on investment.
- We believe dividends can be a sign of strong fundamentals because companies that pay dividends have to generate enough cash flow to cover ongoing capital expenditures as well as regular disbursements to shareholders.
Darren415
By William D. Hunter
Many high-yielding stocks are trading at attractively large discounts. Are dividends ready for a comeback?
Once upon a time, dividends played a starring role in equity markets—until 14 years of easy money whetted investors’ appetite for risk and created a massive tailwind for unprofitable, long-duration growth stocks.
For some perspective, consider that dividends contributed between 25% and 100% of total equity returns (income plus capital appreciation) in every decade between 1910 and 2010. Then dividend investors started swimming upstream: Over the next ten years, dividends accounted for just 15% of the S&P 500 index’s total return.
Which begs the question: In what appears to be a new economic regime, marked by higher rates and perhaps more resurgent economic volatility, are we marking the start of yet another “dividend decade”?
I believe so.
First, valuations appear to be attractive: Stocks yielding north of 2.5% are trading near their largest discount to the equity market in recent memory.1
Second, dividend payments tend to be less volatile than earnings-multiple expansions and contractions, providing a relatively steady return on investment. Consequently, dividend-paying stocks tend to have lower betas and shorter durations than non-dividend-paying stocks. Better yet, dividend growth may also offer welcome protection against inflation.
Third, we believe dividends can be a sign of strong fundamentals because companies that pay dividends have to generate enough cash flow to cover ongoing capital expenditures as well as regular disbursements to shareholders.
For these reasons and more, it’s not surprising that dividend payers have historically outperformed non-dividend payers over most investment periods.2
As investors fish for reliable returns in this volatile market, we believe they should cast their lines in the dividend stream.
1Neuberger Berman / Wolfe Research
2Neuberger Berman / Strategas
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