Dividend stocks have been roaring back to life in August, outgunning major indexes and giving some hope to income-loving investors that the upbeat trend is just beginning.
The FTSE Canada High Dividend Yield Index, which is heavily focused on the big banks, telecom companies and pipelines, has risen 7 per cent since the end of July. The S&P/TSX Composite Index lags with a gain of just 2.6 per cent over the same period.
The U.S. picture looks almost as bright. The S&P High Yield Dividend Aristocrats Index, which tracks the highest-yielding stocks in the S&P 1500 that have raised their distributions every year for the past 20 years, has rallied 5.6 per cent since the end of July.
That’s significantly better than the 3-per-cent gain by the S&P 500 over the same period, even as the blue-chip index briefly rose to within 1 per cent of a record high on Tuesday.
“There is a realization that these stocks that have not been getting a lot of respect, and maybe the market is taking another look and saying, ‘Hey, there’s a lot to like here,‘” Peter Vanderlee, a portfolio manager at ClearBridge Investments, the New York-based global equity manager, said in an interview.
The rise of dividend stocks follows months of underperformance, as major stock market indexes rebounded from their pandemic lows in March owing largely to surging technology stocks such as Apple Inc., Alphabet Inc. (the parent company of Google), Netflix Inc. and Shopify Inc.
Since March 23, when U.S. indexes touched their bear-market lows, the Russell 1000 Growth Index of the fastest-growing U.S. companies (led by tech stocks) has surged 60 per cent. That is 16 percentage points more than the Russell 1000 Value Index of undervalued stocks (dominated by dividend generators).
Despite the recent gains in dividend stocks, the growth index has beaten the value index by a dazzling 30 percentage points year to date.
Some observers expect growth stocks will continue to dominate over value stocks longer term, given that many of these companies are generating impressive profit and sales growth even as the broader economy convulses.
“Growth is delivering. Tech and health care are the only two sectors offering year-on-year gains in second-quarter earnings,” Sam Stovall, chief investment strategist at CFRA Research, the New York-based investment research firm, said in an interview.
So is the recent strong performance by dividend-paying stocks just a blip? Mr. Vanderlee says he believes that a few factors now working in favour of dividend stocks could have lasting power.
One, government bond yields are exceptionally low, pushing income investors toward stocks that churn out dividends that are rising faster than the rate of inflation. Given that the U.S. Federal Reserve has signalled that it will keep its key interest rate near zero for some time, low bond yields could be here to stay.
Two, the wide performance gap between value and growth stocks should narrow as investors recognize that ignored stocks are relatively cheap.
And lastly, investors may be growing more confident in the ability of high-quality companies with strong balance sheets to pay their quarterly dividends, after enormous economic stimulus and the release of better-than-expected second-quarter earnings results in recent weeks. Goldman Sachs pointed out that companies in the S&P 500 have reported a 34-per-cent decline in their second-quarter profits, year over year, compared with the bank’s expectations for a decline of 60 per cent.
“There was a concern that we were going to see widespread cuts in dividends, but that has not come to fruition. I think there has been the realization that high-quality companies are not going to have to resort to dividend cuts, and dividends for the most part are secure and can continue to grow,” Mr. Vanderlee said.
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