By David Randall
NEW YORK (Reuters) – Expectations that US Treasury bond yields could remain tame through the second half of the year are pushing some investors to take a second look at companies whose dividend payouts outperform US Treasuries.
The ProShares S&P Dividend Aristocrats ETF – a measure of companies that have increased their dividends annually for the past 25 years or more – is up 14.3% this year, compared to a 15.8% increase for the benchmark S&P 500 .
However, some investors believe these stocks could be a good choice in the coming months as a tightening tone from the Federal Reserve and signs of growth maximum dampen expectations that US Treasury bond yields will rebound in US Treasury bond yields who started in the first quarter but recently died Down.
The S&P Dividend Aristocrats Index pays a dividend yield of 2.15%, while the 10-year Treasury pays a dividend yield of 1.48%. The S&P 500 Dividend Aristocrats ETF remains about 4% below its May high.
“The market will increasingly focus on companies with the potential for increasing payouts and increasing ongoing returns,” said Bob Leininger, portfolio manager at Gabelli Funds.
Overall, dividend payouts on the S&P 500 will rise 6% this year and next, which Goldman Sachs estimates is well above the 0.8% growth rate implied by current valuations. Of the 57 companies that cut or suspended their dividends in 2020, 22 resumed or increased their dividends and another 19 are likely to increase their dividends by the end of the year, the company estimates.
Financial firms are likely to set the course for dividend increases after the Federal Reserve eases restrictions on withdrawals and buybacks, noted Mark Haefele, chief investment officer at UBS Global Wealth Management
Companies like Goldman Sachs Group, Morgan Stanley, JPMorgan Chase, and Bank of America announced on June 28 that they would be increasing their payouts after passing the Fed’s stress tests that assess how companies are doing in a major economic downturn would develop. Overall, financial firm buybacks and dividend payments are likely to exceed $ 130 billion, according to analysts’ estimates.
Leininger said he’s starting to target companies like brewer Molson Coors Beverage Co, which suspended its dividend last year, but said in April that it will be reinstating it by the end of 2021.
The company’s shares are up nearly 19% over the year to date.
Dividend-paying stocks trade at less than 18 times future earnings, a small discount to their historical median – adding to their appeal in a market where valuations are higher than historical levels, said Katie Nixon, chief investment Officer for Wealth Management Northern Trust.
“We expect dividends to rise above inflation over the next few years, giving investors the opportunity to generate their own cash flow in a low-yielding world,” she said.
Investors can get a deeper look at the Federal Reserve’s views on inflation with the minutes of its final meeting released on Wednesday, while ISM readings of service industry activity are due to be released on Tuesday. The index hit a record high in May as the economic recovery accelerated.
Dividend-paying stocks appear to be in a sweet spot, offering stable payouts that are expected to rise as the economic recovery continues, said Burns McKinney of NFJ Investment Group.
McKinney is researching companies that suspended or cut their dividends during widespread economic blockades last year and is likely to increase them this year.
“There are a number of companies that will keep up with inflation and in the meantime you will be rewarded with increasing dividend payouts,” he said. These include companies like industrial company Honeywell International Inc and technology company Broadcom Inc, as well as the S&P 500 energy sector, he said.
(Reporting by David Randall; Editing by Cynthia Osterman)