One of the brightest spots in the year that was 2021 in financial markets was the reemergence of dividend stocks and with interest rates residing around historic lows, that rebound materialized none too soon.
It's certainly a plus for advisors because the bond market was a pain in the you-know-what last year and more of that is expected this year. Even at a time when many clients are enthusiastic about growth stocks, dividends still resonate with broad swaths of client bases.
The other side of the coin is that, using history as a guide, dividend stocks can be vulnerable to rising interest rates – a scenario that will almost certainly arrive this year. Rising rates in 2022 probably aren't a matter of “if,” but “when” and the real debate on that front could prove to be how many times the Federal Reserve boosts borrowing costs and if it goes above and beyond the three increases so many experts are wagering on.
Without getting too into the weeds on monetary policy, let's explore why dividend stocks and funds are likely to be pertinent ideas for clients in 2022.
Behold Payout Growth
Although dividend stocks are a prosaic asset class, it's also fertile territory for advisors educating clients. Specifically, many clients are drawn to stocks with high dividend yields while advisors know better. Knowing better means emphasizing payout growth, which is materializing following a rough 2021 in that department.
As it pertains to the S&P 500, “Q4 2021 U.S. common dividend increases were $20.6 billion, down 7.5% from $22.2 billion in Q3 2021 and up 48.5% from $13.9 billion in Q4 2020,” says S&P Dow Jones Indices. “Net indicated dividend rate change increased $18.0 billion, compared to $20.9 billion in Q3 2021, and $9.5 billion in Q4 2020.”
Payout growth is all the more relevant against the backdrop of rising interest rates because companies, particularly those with long track records of boosting dividends, want to entice investors to stick with stocks, not abandon those shares in favor of lower risk Treasuries with freshly higher yields. Good news: There's ample leeway for companies to continues hiking dividends this year.
"Within the S&P 500, companies still appear cautious of increases, as they paid out the lowest percentage of quarterly earnings in over a decade, but still set a dividend payment record in Q4 and 2021,” said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. While COVID continues to dominate the headlines, the market continues to post significant gains, which has reduced yields. Based on the historical dividend increase rate and current indicated dividend rates, 2022 is on track to set another record in 2022, with COVID determining the increase amount."
Room for More Growth
Across the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indexes, the percentages of dividend-paying members as of the end of the fourth quarter were 78%, 64.3% and 50.6%, respectively.
“The yields across dividend-paying market-size classifications also varied, with large-caps at 1.74% (1.93% for Q3 2021 and 2.06% for Q4 2020), mid-caps at 1.98% (2.06% for Q3 2021 and 2.20% for Q4 2020) and small-caps at 2.16% (2.25% for Q3 2021 and 2.44% for Q4 2020),” concludes S&P Dow Jones.
All of the aforementioned percentages imply ample room for payout growth in the year ahead.