Market Reversal Boosts Stocks With Big Dividends

Cash is king right now. The latest evidence: the market’s embrace of dividend-paying stocks over another longtime favorite, companies that do buybacks.

Investors are rushing to companies that promise regular payouts to shareholders, a sign of Wall Street’s hunger for cash on hand as the Federal Reserve raises interest rates and major stock indexes struggle.

The S&P 500 fell 0.8% on Tuesday, while the Nasdaq Composite fell 2.3% as the sell-off in tech stocks intensified. After major indices rallied on Monday, the declines were another example of how trading in the saws has unnerved investors in recent months.

That has investors turning to companies like AT&T Inc..

and cigarette maker Altria Group Inc..

as the broader market undergoes one of its most volatile stretches in a decade. Concerns about rising interest rates, soaring inflation and slowing growth turned the stock market upside down, prompting many investors to dump the high-flying companies that dominated for the past decade, companies that they often pay no dividends or pay only a small one.

Holding cash is incredibly popular on Wall Street today. This is a big change in the way professional asset managers have behaved over the last decade. WSJ’s Dion Rabouin explains why cash is no longer junk. Illustration: Adele Morgan

Corporate executives who chose to buy back shares and pay big dividends were often rewarded by shareholders in the 20 years leading up to the Covid-19 pandemic. Lately, there has been a divergence.

Since the beginning of 2020, companies that pay high levels of dividends have continued to outperform those that pay the least, while the shares of companies that invest the most money in share buybacks have lagged behind those that have the lowest. lower buybacks, according to analysts at Credit Suisse.

“If I have to choose between buying more shares or giving me cash … I’d rather have the cash,” said Max Wasserman, founder of Miramar Capital, which oversees the stocks of dividend-paying companies including United Parcel Service Inc..

which fueled its return to investors this year.

The change shows the premium investors are paying for steady cash payments rather than the promise of future earnings. That preference has only intensified as the Fed embarks on an ambitious campaign to raise interest rates to control inflation. High inflation and rising interest rates reduce the value of future earnings for companies while increasing the attractiveness of cash today.

An exchange-traded fund that aims to invest in companies that throw a lot of free cash, the Pacer US Cash Cows 100 ETF, is up about 1% this year as major indices have posted double-digit declines.

Many of the stocks with the highest dividend yields in the S&P 500 have soared beyond the broader market. AT&T shares are up 14% this year, while shares in Altria Group are up 12% and shares in pipeline operator Oneok Inc..

have added 8.5%. All three stocks have dividend yields greater than 5%, according to FactSet. The benchmark is down 17% in 2022 and has been on the verge of bear market territory.

Companies in the S&P 500 paid out a record $137.6 billion in dividends in the first quarter, according to S&P Dow Jones Indices, with senior index analyst Howard Silverblatt expecting a new record to be set in the current quarter.

The S&P 500 High Dividend Index is up 3.6% in 2022, while the S&P 500 Buyback Index is down 13%.

Dividend stocks haven’t always been stellar performers. In recent years, many investors have flocked to companies with high valuations, many of which offered big payouts in the future rather than now. This year, many of those bets took a U-turn and hit the broader market. Investors said the free cash offered by dividend-paying companies is more valuable to them right now because interest rates are higher.

John Augustine, chief investment officer at Huntington Private Bank, said all of his firm’s equity strategies have been adding dividend-paying stocks in recent months, to the point where each has a higher dividend yield than its benchmark. .

“We don’t know what the Fed is going to do next year, so I want the cash now,” Augustine said.

The desire for cash today is clear in the huge yield gap between large-cap US stocks with the highest dividend yields and those that pay no dividends.

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Shares of the Russell 1000 with the highest dividend yields on November 19, 2021 rose an average of 4% over the following six months, according to Bespoke Investment Group. Shares of non-dividend Russell 1000 companies fell an average of 29% during that time.

Giorgio Caputo, fund manager at JOHCM Global Income Builder Fund, said he has favored energy companies lately because of the prospect of higher dividends. In addition, he has made adjustments to his portfolio due to higher inflation and rising interest rates.

“It’s almost a 180-degree change from what we’ve seen in the last decade,” he said.

Email Karen Langley at karen.langley@wsj.com and Gunjan Banerji at gunjan.banerji@wsj.com

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