Investors love dividend stocks for their yields, but stock returns have been pretty dismal so far this year. Still, a group of investors believe there could be opportunities ahead, provided you know where to look. So far in 2023, there has been a clear divergence in the performance of dividend and non-dividend stocks. The 100 best-performing stocks in the S&P 500 have an average total return of negative 7.94% year-to-date through Nov. 10, according to Bespoke Investment Group. In comparison, the 100 stocks in the index that pay no dividends saw an average gain of 8.94% over the same period, the financial market research firm found. That’s not surprising given that bond market yields have reached levels not seen in decades, experts say. Bond yields move inversely to prices. “The problem is competition, because you can buy three- to five-year investment-grade corporate bonds with a 5 percent yield,” said Andrew Graham, managing partner of Jackson Square Capital in San Francisco. “That’s what’s putting pressure on these (dividend-paying) stocks, or maybe just keeping them from going up.” Still, that pressure could ease as investors anticipate that the Federal Reserve is close to ending its rate hikes, said certified financial planner Dave Sheaff Gilreath, chief investment officer of Sheaff Brock Investment Advisors in Indianapolis. The central bank meets once again this year in December. Although officials have indicated that a rate hike is possible, federal funds futures pricing data suggests a 100% chance that rates will remain unchanged at their current level of 5.25%-5. 50%, according to the CME FedWatch tool. “This speaks to the policy of higher and longer interest rates” that Fed governors have referenced in their speeches, Gilreath said. “Once rates plateau, stocks generally do very, very well.” Specifically, value stocks — which dividend payers typically land on — have historically outperformed for higher and longer periods, he noted. Gilreath, who is also chief investment officer at Innovative Portfolios, believes the most attractive part of the dividend market is small-cap value stocks. An easy way to invest in the space is through exchange-traded funds, he added. IPDP YTD line Dividend Performers ETF (IPDP) year-to-date performance When it comes to specific stocks, Gilreath likes two under-the-radar plays: Brady Corporation and ABM Industries. Both are part of his firm’s Dividend Performers ETF (IPDP), which holds companies that have increased their dividends every year for at least a decade. The company then sorts the stocks by futures risk, choosing the 50 least risky names. The fund has an expense ratio of 1.22%, but has a total return of 21.8% in 2023, according to Morningstar. Brady, which makes identification and health products, has a dividend yield of 1.7%. ABM Industries, which yields 2.1%, provides janitorial, facilities engineering and parking services for commercial real estate properties, entertainment venues and healthcare facilities. “They were really hurt during the pandemic because no one was going into the buildings. Now they’ve gotten through it,” Gilreath said. Finding Income in a Downturn Although Jackson Square Capital’s Graham expects lower returns in 2024, which are generally positive for income-generating stock portfolios, he is very specific about what he adds and Why. This is because he expects an economic slowdown or recession next year. “There has to be a strong foundational story,” he said. In this scenario, chemical manufacturers will likely become even more attractive, he said. At the top of the list is Dow Inc., thanks to its strong balance sheet and cost-of-goods advantage it has over international competitors, Graham said. Dow has a dividend yield of 5.4%. Graham also likes LyondellBasell, which yields 5.2%. “These two guys make polypropylene from cheap American natural gas, while the rest of the world makes it from crude oil,” he said of Dow and LyondellBasell. “There’s just not that pressure on these American producers. So there’s room to set prices. There’s a big cost advantage.” He also likes some European energy stocks at the moment. Shell and TotalEnergies are his picks and both have US-listed shares. Shell pays a dividend yield of 3.7%, while TotalEnergies returns 3.8%. Diversifying Against Recession Risk When it comes to dividends, investors should look for quality over quantity. “Declining profits and financial instability could lead some companies to reduce or even suspend their dividends to preserve liquidity,” said Laura Mattia, a certified financial planner at Atlas Fiduciary Financial in Sarasota, Florida. “Look for companies with strong balance sheets, sustainable cash flows and a history of maintaining or increasing dividends during economic downturns,” she added. For investors who want to stay diversified, consider Dividend Aristocrats, that is, stocks that have increased their dividends in each of the last 25 years. ETFs include the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). The fund has an expense ratio of 0.35% and a total return of 1% in 2023, according to Morningstar. “These are good choices because you’re dealing with robust companies that know they can maintain and increase their dividend,” said George Gagliardi, CFP at Coromandel Wealth Management in Lexington, Massachusetts. He also highlighted the Vanguard Dividend Appreciation ETF (VIG), which tracks the S&P US Dividend Growers Index. The fund has a year-to-date total return of 8.28%, according to Morningstar, and an expense ratio of 0.06%. “You would never put all your chips on one square of the roulette table; you would spread them out,” Gagliardi said. “And I like ETFs: if I choose something with 50 stocks, I’m diversified.”
Dividend stocks have had a tough year. Where professionals see opportunities
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