The dividend stock story, in one chart

Stockbyte / Thinkstock

Dividend stocks have outperformed this year. Global Chief Investment Strategist Richard Turnill explains what to focus on now.

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.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

Index returns are for illustrative purposes only.  Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

© 2016 BlackRock Asset Management Canada Limited. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission.  iSC-2358