Analysis: Volatility in U.S. markets boosts the appeal of dividend-paying stocks

NEW YORK, July 12 (Reuters) – Investors are taking a second look at stocks of dividend-paying companies as they seek to bolster their portfolios against soaring inflation and a sharp drop in asset prices.

Often overlooked in favor of buzzy growth names before the recent spike in consumer prices, the allure of dividend-payers has grown this year as an aggressive Federal Reserve and inflation worries combine to beat stocks and bonds.

Bank of America and Goldman Sachs are among the banks that have recently touted dividend-paying stocks. The ProShares S&P Dividend Aristocrat ETF (NOBL.Z) – which invests in companies that have increased their dividends every year for at least 25 years – has seen positive net inflows for all but one week this year, according to Lipper Fund Flows .

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The fund is down 11.9% year-to-date, versus a 19.3% drop in the S&P 500 Index (.SPX).

“We think it makes more sense to focus on more stable companies with growing cash dividends that offer protection against volatility and also against inflation,” said John Mowrey, chief investment officer of NFJ Investment Group. .

Proponents of dividend-paying stocks say the income helps protect a portfolio from falling stocks. At the same time, companies that look set to increase their dividends can be a more stable source of income than bonds, which have a fixed coupon that can be eroded by rising prices.

Overall, the S&P 500 is expected to post a new record for quarterly dividend payouts in the third quarter, thanks in part to higher payouts from energy companies, after rising 2.3% to $16.63 per share in the second quarter, according to data from the S&P Dow Jones indices.

Dividend payers were often seen as a less than glamorous corner of the stock market over the past decade as low inflation, a dovish Fed and relatively stable growth favored big tech-focused names that fueled gains of the S&P 500. For decades, the bond bull market gave bond investors a tailwind and boosted total returns as Treasury yields fell to record lows in 2020.

Soaring inflation and tighter monetary policy, however, made this a brutal year for both asset classes. The S&P 500 had its worst first half since 1970 and the US bond market – as measured by the Vanguard Total Bond Index fund – is down 10.3% year-to-date, on track for its worst annual performance in history. Read more

As “cash gains value amid the Fed hike, we expect dividend yield and bird-in-hand strategies to continue to outperform” in the second half, BofA strategists wrote earlier. this month.

Investors await consumer price data from the United States on Wednesday after figures for the previous month showed inflation rising at its fastest rate in more than 40 years, prompting a massive rise in inflation rates. Fed and driving stocks down. Read more

NJF Group has recently added to its positions in companies it believes are poised to continue increasing their dividends, Mowrey said. These include semiconductor company Microchip Technology Inc and biotech-focused REIT Alexandria Real Estate Equities Inc (ARE.N).

OTHER STRATEGIES

Not all investors are convinced that dividends are the best source of income. Strategists at BlackRock, the world’s largest asset manager, said in a webinar on Monday that they are focusing on short-term, investment-grade credit in the second half, given rising risks from recession.

The company has reduced its holdings of developed-market stocks in part because investors are discounting the likelihood that earnings growth will continue to slow. Earnings season kicks into high gear this week as companies such as Delta Air Lines Inc and JPMorgan Chase & Co report results. Read more

With little end to market volatility in sight, however, others are looking for stock dividends to help stabilize their portfolio returns.

The S&P 500 Index pays an overall dividend yield of 1.52%, while some well-known dividend payers like materials company Amcor Plc – the largest weighting in the S&P 500 Dividend Aristocrats Index – pay dividends of 3.81%, against a yield of 2.90%. of the 10-year reference Treasury.

Michael Clarfeld, portfolio manager at ClearBridge Investments, added to his position in companies such as Pioneer Natural Resources Co (PXD.N).

“In a world where inflation erodes purchasing power, dividends are a way to stay ahead,” he said.

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Reporting by David Randall in New York Editing by Ira Iosebashvili and Matthew Lewis

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