Financial assets don’t always work on the time frames clients desire, but every now and then, there are examples of positives materializing at just the right time.
The resurgence of dividends dating back to last year is a prime example. As advisors remember, 2020 was a death valley of sorts for dividends as scores of S&P 500 companies slashed or suspended payouts to conserve cash amid the coronavirus pandemic.
Fortunately, that ominous scenario was short-lived and while not all of 2020’s dividend offenders have restored payouts, S&P 500 dividends hit an annual record in 2021 and data from the first two quarters of 2022 indicate another record is likely in the offing this year.
In the first quarter, “nearly every US company in the 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
“Globally, first quarter dividends jumped by 11% on a headline basis to a total of $302.5bn, also a record for the seasonally quieter first three months of the year. Underlying growth was even stronger at 16.1%. Janus Henderson’s analysis shows that dividends have more than doubled since 2009, when the Index launched,” adds the research firm.
With inflation high and bonds faltering, rebounding dividends are good news for advisors and clients alike. Add to that, some experts see more reasons to believe in dividends.
Go-Go Days for Dividends
One of the big takeaways from 2022 performances delivered by payout stocks is that high-dividend fare are really delivering for incomes.
That’s notable because interest rates are still low and because high-dividend stocks historically falter against the backdrop of rising rates. This year, however, they’re beating the broader market by notable margins. Still, the risk/reward scenario with such names must be assessed. Fortunately, the outcome is likely to be attractive to many clients.
“One of the risks of dividend investing is sector concentration. Companies in the Utilities and Consumer Staples sectors tend to pay much higher dividends than companies in other sectors. Seeking high-dividend payers without considering sector allocation can result in a lack of diversification, potentially making a portfolio more vulnerable during periods of high volatility,” notes Jeffrey Kleintop of Charles Schwab.
Advisors can and should impart upon clients the search for big dividends shouldn’t be confined to a small number of sectors. Fortunately, there are some funds that oblige on this diversification front.
“A focus on high-dividend-paying stocks doesn't have to mean abandoning sector diversification. High-dividend payers can be found in all sectors and have been outpacing the market in nearly all of them,” adds Kleintop.
Good Time to Consider Big Dividends
It’s likely that advisors and clients alike are hearing about the suddenly altered definition of exactly what constitutes a recession.
In the essence of avoiding politics, let’s just stick with the tried and true definition of recession – the one that worked for decades prior to 2022. That being two consecutive quarters of contracting GDP growth. By that standard, a recession is either here or pretty darn close to arriving and that highlights potential allure with high-dividend stocks.
“History shows us the benefits of a focus on high-dividend payers during recessionary bear markets,” concludes Kleintop. “In every recessionary bear market of the past 50 years high-dividend-paying stocks have outperformed the overall market, except for the Global Financial Crisis in 2008-09, when financials were forced to eliminate their dividends.”