Dividend stocks look attractive with a volatile year that nets measly returns expected ahead

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Traders work the floor of the New York Stock Exchange on August 23, 2019 in New York.

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Stocks may be at record highs, but 2020 has already proven to be a volatile year, leading a growing cohort of Wall Street strategists to recommend stable dividend-paying investments.

Favorite names recommended by the banks include Citgroup, Verizon and Cisco. There are also a bevy of exchange-traded funds which track the style.

Unlike growth stocks that have led the market’s record-long bull run, dividend stocks typically don’t offer dramatic price appreciation, but they do provide investors with a steady stream of income. This type of strategy can bode well for investors in a much riskier year ahead grappling with Middle East unrest, more China trade talks and a U.S. presidential election.

“Dividend strategies have increasingly become top of mind for investors that want to participate in the up market that continues but they want to be prepared for the volatility that feels like is around the corner,” said Todd Rosenbluth, head of ETF & mutual fund research at CFRA.

Wall Street analysts largely see much more modest returns in 2020 following a historic run last year that saw the S&P 500 soaring nearly 29%. The average year-end target for the benchmark comes to 3,345, a measly 2% gain, according to CNBC’s Market Strategist Survey. In comparison, a popular dividend-focused exchange-traded fund — iShares Select Dividend ETF — currently has a dividend yield of 3.6%.

“If returns are more muted, the income component of the total return is going to play a more meaningful role,” Rosenbluth said.

Time to shift

Since the end of 2019, a slew of top financial institutions including Goldman Sachs, UBS and Bank of America Merrill Lynch have started advising clients to buy dividend-paying stocks and strategies to hedge against rising risks and an aging bull market.

Investors seem to have already warmed to the idea. In the fourth quarter alone, dividend ETFs experienced more than $10 billion in new money, which was more than any other factor-oriented strategies, according to data from CFRA. The inflows came even as the stock market rallied into the year-end, a sign that investors were getting nervous.

“How to hedge against things going wrong? We now prefer utilities (pure domestic, stable earnings) over staples as a way to generate high dividend,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, said in her “year ahead” outlook.

UBS warned clients of a continued slowdown in the economy last month and screened for a handful of dividend growers to combat that.

Stocks with the fastest dividend growth include Citigroup, pharmaceutical company Eli Lilly and medical equipment and drug producer Baxter, UBS said.

There are a variety of ETFs on the market that lump a bunch of high-dividend stocks together. Below are the top five dividend-focused ETFs arranged by assets, according to ETF.com.

‘Low-for-longer interest rates’

Adding to dividend strategies’ appeal is how low interest rates are, which makes bonds less attractive to investors seeking income. The Federal Reserve slashed borrowing cost three times in 2019, pushing 10-year Treasurys below 2% and lower than the S&P 500’s dividend yield of 2.1% last year.

“Low-for-longer interest rates are a reality, no longer a forecast,” Steven Major, HSBC’s global head of fixed income research, said in note. “The decade of denial saw expectations of cyclical recovery often disappointed and a similarly misplaced belief in the view that bond yields would rise.”

In an environment of disappearing yields, Goldman started touting its dividend growth basket as one of its two recommended strategies in 2020, which “offers longer-term investors a premium yield while positioning for a value rotation.” The basket has a dividend yield of 3.6% and twice the S&P 500’s dividend growth through 2021, Goldman said.

Stocks in the Goldman portfolio include AT&T, Verizon, Morgan Stanley, Amgen and Cisco.

Record payments

Time could be ripe for dividend stocks to stage a comeback after a decade of underperformance. They have trailed the S&P 500 consistently for the past 10 years as growth stocks with rapid profit increases have enjoyed most of the love.

Last year, stocks with the highest dividend yields underperformed stocks with low or no yields as the S&P 500 notched its best annual performance in six years, according to Bespoke Investment Group.

Meanwhile, dividend issuance is showing no signs of slowing. S&P 500 stockholders received a record amount of dividends in the fourth quarter of 2019, totaling $126.4 billion, according to S&P Dow Jones Indices. The amount was a 5.5% increase from the same quarter in 2018.

— CNBC’s Michael Bloom and Nate Rattner contributed to this report.

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