Dividends Provide Reason for Equity Optimism

One of the more encouraging stories from the U.S. equity market in 2021 was the resumption of dividend growth, which was sorely needed following a dismal 2020 on that front.

Increasing payouts were all the more meaningful at a time when interest rates hovered near zero and zero-coupon bonds, the most rate-sensitive government debt, gave back all of the gains accrued in 2020. Advisors should expect dividends to be in the spotlight again this year with payout growth providing some optimism for broader market performance.

In fact, Bank of America Global Research suggests dividends could account for the bulk of clients' total equity market returns in 2022 and S&P 500 payout growth could be as high 13%. In its own right, that's an impressive statistic – assuming it proves accurate. It's even more impressive when considering last year's pace of dividend growth and that that growth is essential in keeping clients on top of inflation.

The case for dividends is bolstered by multiple, including the trillions upon trillions of dollars of cash S&P 500 companies are sitting on and expectations that S&P 500 earnings per share could grow by as much as 10% this year. To be sure, those are compelling attributes. Fortunately, advisors can efficiently tap into the theme of dividend growth in familiar fashion.

Aristocracy Is Awesome

Well, not necessarily from a historical geopolitical perspective, but aristocracy is something to behold when it comes to dividend stocks. Said another way, the S&P 500 Dividend Aristocrats Index and related benchmarks have enviable track records of delivering dependable payout growth for investors and the strategy is highly relevant in the current environment.

“All else being equal, more growth equals more confidence. Similar to 2020, the place to find inflation-beating income growth was the S&P 500 Dividend Aristocrats,” says ProShares Senior Investment Strategist Kieran Kirwan. “The Aristocrats, all of which have produced at least 25 consecutive years of dividend increases, delivered robust rates of dividend growth and remain well positioned for 2022.”

Accessible via the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), the S&P 500 Dividend Aristocrats Index delivers ample upside capture while typically being less volatile than the broader market. The benchmark also typically declines less than standard equity indexes when markets decline.

Of course, there are trade-offs clients need to be made aware of. Owing to the fact that dividends are still a relatively new phenomenon in the technology space, there aren't many members of that sector that meet NOBL's requirements for admission. As such, the sector represents just 3.12% of NOBL's weight. Communication services is even less at 1.53%.

In other words, NOBL isn't the place to go for growth stocks, but it does an admirable job of blending defensive and cyclical value sectors. For example, consumer staples and industrial stocks combine for over 39% of the fund's roster.

Confidence Matters

One of the elements of dividends that clients often overlook – advisors should help them realize this – is dividends signal confidence and that confidence is all the more meaningful at a time of soaring inflation, likely rising interest rates and other macro economic challenges.

“Amidst rising costs, a growing dividend stream takes on added significance for income investors,” adds Kirwan. “Growing a dividend is perhaps the most obvious signal that management can send when it’s confident in a company’s ability to deliver consistent and growing cash flows and earnings, which ultimately are the lifeblood of dividends. All else being equal, more growth equals more confidence.”

And it is that confidence that can prevent clients from equity market disappointment and elevated volatility as 2022 unfolds.

Related: New Look Refreshes Proposition for Value ETF