Cash is king right now. The latest evidence: Another longtime favorite in the market, the embrace of dividend-paying stocks at buyback firms.
Investors are rushing to companies promising regular payments to shareholders, a sign of Wall Street’s appetite for cash on hand as the Federal Reserve raises interest rates and major stock indexes struggle.
They’re turning to companies like AT&T Inc. and cigarette maker Altria Group Inc. as the broader market hits one of its most volatile parts of the last decade. Worries about rising interest rates, skyrocketing inflation and slowing growth turned the stock market upside down, forcing many investors to abandon the high-flying companies that have dominated the past decade—companies that often pay no dividends. Or only a little.
Corporate executives who opted to buy back shares and pay hefty dividends were often rewarded by stockholders for the 20 years leading up to the Covid-19 pandemic. Recently, there has been a difference.
According to analysts at Credit Suisse, since the start of 2020, companies that pay higher levels of dividends have continued to outperform those with lower payouts, while companies that invest the most money in stock repurchases have the least. lagged behind those with buybacks.
Max Wasserman, founder of Miramar Capital, which oversees stocks of dividend-paying companies including United Parcel Service Inc., said, “If I have a choice between buying more of your stock or giving me the cash… I’ll have cash.” ., which boosted its return to investors this year.
This change reflects the premium that investors are paying for a stable cash payment rather than the promise of future profits. That priority has intensified with the Fed launching an ambitious campaign to raise interest rates to curb inflation. High inflation and rising interest rates eat away at the value of future earnings of companies, increasing the attractiveness of cash today.
An exchange-traded fund that aims to invest in companies that throw away lots of free cash, the Pacer US Cash Cause 100 ETF has risen nearly 2% this year, while major indexes have posted double-digit declines.
Many of the stocks with the highest dividend yields in the S&P 500 are outpacing the broader market. AT&T shares are up 12% this year, while Altria Group shares are up 10% and pipeline operator ONEOK Inc. is up 8.2%. According to FactSet, all three stocks have dividend yields of more than 5%. The benchmark index is down 17% in 2022 and is on the edge of bear-market territory.
Companies in the S&P 500 paid a record $137.6 billion in dividends in the first quarter, according to the S&P Dow Jones Index, and senior index analyst Howard Silverblatt expects the current quarter to set a new record.
The S&P 500 High Dividend Index is up 2.8% in 2022, while the S&P 500 Buyback Index is down 12%.
Dividend stocks haven’t always been star performers. In recent years, many investors piled into companies with higher valuations, many of which offered larger payouts in the future rather than now. This year, many of those bets have staged a U-turn and have had an impact on the broader market. Investors said the free cash offered by dividend-paying companies is more valuable to them right now as interest rates are higher.
John Augustine, chief investment officer at Huntington Private Bank, said his firm’s equity strategies have compounded dividend-paying stocks in recent months to the point where each has a higher dividend yield than its benchmark.
“We don’t know what the Fed is going to do next year, so I just want the cash,” Augustine said.
The urge to cash in is evident today in the yawning gap in performance between large-cap US stocks with the highest dividend yields and non-dividend-paying stocks.
Shares of Russell 1000 rose an average of 4% over the next six months, with the highest dividend yield on November 19, 2021, according to Bespoke Investment Group. Shares of the non-dividend Russell 1000 companies fell an average of 29% during that time.
Giorgio Caputo, fund manager at JOHCM Global Income Builder Fund, said he has favored energy companies lately because of the potential for higher dividends. Additionally, he has made adjustments to his portfolio due to high inflation and rising interest rates.
“It’s about a 180-degree change from what we’ve seen in the past decade,” he said.