This week’s chart shows how U.S. dividend stocks have outperformed the S&P 500 over the past year, a trend we have also seen in other regions, as ultralow bond yields have intensified the hunt for income.
Year-to-date flows into dividend-focused exchange traded products (ETPs) have reached US$7.4 billion, more than seven times the 2015 total, according to our data.
So what’s next for dividend stocks? We don’t see strong demand for dividend stocks dissipating anytime due to low interest rates, attractive dividend yields and aging populations. But we would now look specifically to dividend growers to drive returns.
The insatiable search for yield has driven many income assets to high valuations, but dividend growers are still attractively priced at 13.4 times forward earnings, our analysis shows. These quality stocks with a consistently growing dividend stream also tend to be more resilient in bumpy and down markets. They have outperformed the broader market during high-volatility periods, according to BlackRock research. We see higher volatility ahead, given the risk of a British exit from the European Union, elevated U.S. valuations and the potential for a Federal Reserve rate increase in 2016.
High-dividend stocks have outperformed dividend growers in the past year, but our analysis shows they historically have been vulnerable to higher rates. Dividend growers, by contrast, tend to perform well in a gradually rising rate environment. They tend to have more rate-resilient characteristics, such as strong balance sheets, and benefit from a growing economy.
We like companies with lower pay-out ratios and strong cash flows, at a time when pay-out ratios are historically high. We see attractive dividend-growth opportunities in global pharmaceuticals, international telecom, emerging market (EM) infrastructure and selected information technology companies.
Read more market insights in my Weekly Commentary.
Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.