Dividend investing: Three reasons why it’s back


Popular dividend-investing strategies generally lagged the S&P 500 the past couple years but are making up some lost ground so far in 2014.

The reemergence of dividend investing this year could be due to a surprise decline in U.S. interest rates, volatility in riskier areas of the market, and a belief that companies with strong balance sheets can perhaps grow their dividend payouts.

“Dividend investing is back in vogue as lofty equity valuations, amid still sluggish economic growth, cap the potential for further share price gains while low bond yields limit the attraction of fixed-income assets,” Reuters reports.

10-year Treasury note yield

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^TNX data by YCharts

The iShares Select Dividend ETF (DVY) trailed the S&P 500 the past two years, but has more than doubled the total return of the S&P 500 so far in 2014 with a gain of nearly 6%.

Dividends can contribute meaningfully to the performance of long-term stock investors. For example, since 1989, the S&P 500 has returned 7.1% compounded annually, and 9.4% when dividends are included, according to S&P Dow Jones Indices.

Here are three reasons why investors are rediscovering dividends in 2014:

  • Falling interest rates: The consensus view on Wall Street was that interest rates would continue to rise in 2014 to continue the trend from the second half of last year. That hasn’t happened. “[W]ith bond yields so utterly low … you buy equities to bolster your returns,” said Andrew Parry, chief executive officer of Hermes Sourcecap, in the Reuters article. Of course, investors should be careful when stretching for yield with more risk, since stocks are typically more volatile than bonds.

  • Safety: You can make the argument that investors are pretty complacent with the CBOE Volatility Index (VIX), Wall Street’s fear gauge, dropping below 12 this week to approach a multi-year low. And the S&P 500 is essentially trading at all-time highs. However, market internals tell a slightly different story underneath the calm surface. Riskier small-cap and high-valuation stocks have taken a hit recently. Some investors who want to stay in the market could be rotating to dividend-paying stocks to provide a cushion against any potential pullbacks. Companies that pay steady dividends tend to be more stable and established. Although a caveat is that a very high dividend yield could be a sign that a company is distressed.

  • Dividend growth: Similarly, rather than hunting for companies with high dividend yields, other investors are favoring those that can potentially grow their payouts. During the first quarter, dividend net increases (increases minus decreases) rose nearly $18 billion for U.S. domestic common stock, according to S&P Dow Jones Indices. In fact, a record 1,078 dividend increases were reported during the first three months of 2014. “Companies are being pressured to use their available cash, resulting in near record levels of total shareholder returns from public companies from both cash dividends and buybacks,” said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. “The continuation of this trend indicates the potential for a strong year for dividends.”

Photo credit: Aaron Patterson via Flickr Creative Commons

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Dividends reflect past performance and there is no guarantee they will continue to be paid. Past performance is no guarantee of future results.

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