Dividends Proving Their Mettle in Turbulent 2022

The S&P 500 rallied last week, posting its best weekly performance since November 2020, but the benchmark domestic equity gauge is still down 12.57% and two-thirds of its components are off at least 20%. Meaning those stocks are in bear markets.

One way of looking at the S&P 500’s dour performance is that finding equity segments that are working this year is difficult. Indeed, that’s the case, but give some credit to dividend stocks and the related exchange traded funds because many constituents in the dividend landscape aren’t just performing less poorly than their broader market. Some of payout-related assets are generating positive year-to-date returns.

Add to that, dividend growth set a torrid pace in the first quarter, providing income investors with some buffer against inflation.

“Nearly every US company in the Janus Henderson Global Dividend Index (99%) increased their payments or held them steady, as dividends continued to be a reliable source of income growth for shareholders,” according to a statement issued by Janus Henderson.

Good Time for Dividends

Enhancing the allure of dividend strategies for income-starved clients are multiple factors. Those include surprisingly strong showings by high-dividend stocks and ETFs – assets that normally wilt against the backdrop of rising interest rates. This year, however, those equities and funds are soaring with many not only generating positive returns, but offering higher yields than 10-year Treasuries, too.

Additionally, as noted above, payouts are growing and over the long haul, dividend growth is useful in terms of fighting inflation. Then there’s the quality element. Dividend growth is considered a quality trait and quality can be a good place to be in bumpy markets. Add it all up, and it’s not surprising that advisors are allocating more capital to dividend ETFs.

“Dividend ETFs seem to have grown in popularity, with net inflows totaling $17.0 billion over the past 3 months and $44.5 billion over the past 12 months, as of 4/29/22,” according to First Trust Research. “In April, while equity ETFs overall endured $5.9 billion of net outflows, dividend ETFs reported net inflows totaling $7.8 billion1 . The increase in demand for dividend ETFs can partly be attributed to the strong relative performance many of these ETFs have provided this year. We expect demand to remain robust for those investors seeking exposure to higher quality stocks, alternative sources of income, and potential dividend growth.”

Strategies for Superior Dividend Identification

Advisors know the following, but many clients do not: The dividend traits of various sectors aren’t uniform. Hence, it’s surprising that high-dividend strategies are thriving this year because sectors fitting the high-dividend bill are usually inversely correlated to rising rates. Think real estate and utilities.

However, the success of high-yield dividend strategies is linked to dividend growth. As in companies with above-average payouts have the balance sheets and resources to support current dividend obligations and, potentially continuing growing distributions.

“By definition, a high dividend yield implies a stock’s price is relatively low compared to its dividend. In some instances, this reflects a perception that dividend cuts could be forthcoming. Consequently, we believe dividend sustainability is key for high dividend yield ETFs,” concludes First Trust. “Dividend growth strategies are often appealing to investors concerned about high inflation eroding the buying power of their investment income. Thus, the focus for such strategies is not necessarily on the highest dividend-yielding stocks today, but rather on total return and dividend-payers that may be well-positioned to raise dividends in the future.”

Related: ETFs Continue Popping Up in Insurance General Accounts