By David Randall
NEW YORK (Reuters) – Expectations that Treasury yields may remain subdued in the second half of the year are prompting some investors to take a second look at companies whose dividend payments exceed those offered by bonds. of the United States government.
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 index of reference.
However, some investors believe these stocks may be a good bet in the months ahead, as a more aggressive tone from the Federal Reserve and signs of peak growth dent expectations that Treasury yields they will resume an increase that started in the first quarter but has died more recently. under.
The S&P Dividend Aristocrats Index pays a 2.15% dividend yield, while the 10-year Treasury pays a 1.48% dividend yield. The S&P 500 Dividend Aristocrats ETF remains approximately 4% below its May peak.
“Increasingly, the market will focus on companies with the potential for increasing payments and current increasing returns,” said Bob Leininger, portfolio manager at Gabelli Funds.
Overall, dividend payments on the S&P 500 will grow 6% this year and next, well above the 0.8% growth rate implicit in current valuations, according to estimates by Goldman Sachs. Of the 57 companies that reduced or suspended their dividends in 2020, 22 have resumed or increased their dividends and another 19 are likely to increase their dividends by year-end, the firm estimates.
Financial firms are likely to lead the way to dividend increases after the Federal Reserve relaxed limits on payments and buybacks, said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Companies included Goldman Sachs Group (NYSE :), Morgan stanley (NYSE :), JPMorgan Chase (NYSE 🙂 and Bank of America (NYSE 🙂 said on June 28 that they were increasing their payments after passing the Fed’s stress tests, which assess how companies would fare in a significant economic recession. Overall, the total buyback and dividend payments by finance companies are likely to exceed $ 130 billion, according to analyst estimates.
Leininger said it is starting to target companies like the brewery. Molson coors (NYSE 🙂 Beverage Co, which suspended its dividend last year but said in April that it hopes to reinstate it by the end of 2021.
The company’s shares are up nearly 19% so far this year.
Dividend-paying stocks trade at less than 18 times future earnings, a small discount from their historical median, increasing their attractiveness in a market where valuations are high compared to historical levels, said Katie Nixon, principal. of wealth management investments. Northern trust (NASDAQ :).
“We anticipate that dividends will increase at a rate above inflation over the next few years, offering investors the opportunity to generate their own cash flow in a performance-hungry world,” he said.
Investors can get a deeper insight into the Federal Reserve’s views on inflation when the minutes of its most recent meeting are released on Wednesday, while the ISM’s reading of service industry activity will be released on Tuesday. The index hit a record in May as the economy’s recovery accelerated.
Dividend-paying stocks appear to be in a sweet spot, offering stable payouts that are expected to rise if the economic rebound continues, said Burns McKinney of NFJ Investment Group.
McKinney is looking for companies that suspended or cut their dividends during the widespread economic lockdowns last year and are likely to increase them this year.
“There are a number of companies that will keep up with inflation and in the meantime will be rewarded” by increasing dividend payments, he said. This includes companies such as industrial firm Honeywell International Inc (NASDAQ 🙂 and technology firm Broadcom (NASDAQ 🙂 Inc, as well as the energy sector S&P 500, he said.