Investors buy dividend stocks during market turmoil

An early-year decline in major US stock indexes has some investors looking for protection by dumping shares of high-growth technology stocks to stodier businesses that pay cash to shareholders, including banks, oil companies and telecommunications.

Through February 4, the S&P 500 High Yield Dividend Index—composed of the top 80 dividend-paying companies of the S&P 500—compared with a negative total return of 5.5% for the broader benchmark dividend through Friday. including was up 2.1%. According to the S&P Dow Jones Index, the average dividend-paying stock in the S&P 500 soared 6.6 percent more than nonpayers in January, the biggest margin for payers in 17 years.

Rising inflation and the prospect of the Federal Reserve raising interest rates for the first time in more than three years have raised questions about the stability of the economy. Analysts see income-generating stocks as a safe harbor from those concerns, while once-high-flying stocks, including stocks of some tech giants, have been kept short as investors weigh tomorrow’s winners and losers. Let’s try to choose.

The S&P 500 and Nasdaq Composite suffered its worst January in more than a decade as big tech stocks tumbled. The indexes are down 5.9% and 10%, respectively, this year, while the Dow Jones Industrial Average is down 3.4%. Meanwhile, shares of energy giant Exxon Mobil Corp and regional bank People’s United Financial Inc are up double-digit percentages. Both have a dividend yield of at least 3.6%, which is nearly three times higher than the S&P 500.

Sandy Villere, a portfolio manager at wealth management firm Villere & Co., which manages $2.4 billion in equities and fixed-income strategies, said it saw clients buy more shares of Chevron Corp. as well as consumer products company Newell Brands Inc. Huh. This year PepsiCo Inc. Newell, which has a dividend yield of about 4.2%, is up 0.6% so far this year, while PepsiCo has a 2.5% payout and is down 1.1%. Chevron has a 3.8% dividend yield; Its shares are up 18%.

“In this environment, a good place to hide would be some of these dividend-oriented companies that are going to grind through this market turbulence,” Mr. Villere said.

Investors poured $7.5 billion into the fund that bought dividend-paying shares in January, the most on record, with more than $2 billion in inflows during the week ended February 2, according to data from Refinitiv Lipper.

Many dividend payers have pricing power, are affordable and offer hefty payouts, said Steve Chiavrone, head of multiset solutions at Federated Hermes. His firm’s Strategic Value Dividend Fund is up 4.6% so far this year.

“We are due for a rotation, and that rotation is happening right now,” said Eric Ditton, president and managing director of The Wealth Alliance, which manages $880 million in assets, 14% of which are on dividend-oriented strategies. are focused.

The attractiveness of dividend stocks depends to some extent on bond yields. Generally, when bond yields are less than a stock’s dividend yield, investors do not see an equity option. The benchmark 10-year US Treasury note traded at 1.92% on Monday, which is higher than Friday’s 1.3% dividend yield on the S&P 500. However, when adjusted for expected future inflation, real bond yields remain around negative 0.5%, making the stock a more attractive option for many investors.

Investors may lose their taste for dividend-paying companies if they cut payments amid deteriorating economic conditions. According to S&P, with 33 increases in January, slightly more than a year ago, companies have generally increased payouts after solid growth last year when there were 372 increases or the introduction of dividends and five deductions or suspensions. This compares with a volatile 2020 with 298 enhancements or initiations and 69 reductions or suspensions.

A traditional favorite of dividend-minded investors cut its payout earlier this month: AT&T Inc. The telecommunications company said it would nearly halve its dividend following the spinout of its WarnerMedia division. Its shares are down 6.2%.

“Investors need to address the market contingencies,” said Philip Toews, chief executive and co-portfolio manager, Toews Asset Management.

Concerns about economic conditions have prompted Mr Toes to be particularly on the defensive. His firm has converted about 90% of its assets from mostly equities and bonds to cash. The remaining 10% has been replaced with low-volatility stocks that pay dividends, including Verizon Communications Inc. and Philip Morris International Inc.

For now, investors say they’re focusing on the biggest dividend-paying stocks, where the earnings continue to outweigh the earnings generated by the bonds. Cigarette maker Altria Group Inc. and Philip Morris Sport dividend yields are up 7% and 4.7%, respectively, and their stocks are up at least 6.3% so far this year. Exxon Mobil is up 35% so far this year, thanks to rising oil prices and the fact that it pays a 4.2% dividend yield.

“The story of 2022 is revenge for the boring,” said Mr. Chiavaron of Federated Hermes.