Best Ideas
A correction in growth and technology-oriented sectors provides opportunity to revisit companies with “frothy” valuations. U.S. small caps offer value and remain attractive, as they may benefit from a re-opened economy and stimulus. We are focusing on quality across geographies, sectors and industries. Technology and consumer-related industries in emerging markets are also attractive.
In Focus: Dividends Return
Dividends have always been an important part of the equity market. Since 1930, dividends and reinvestments accounted for over 40% of the annualized return of the S&P 500. But 2020 marked the worst calendar year for dividend cuts and suspensions since 2009, as the policy response to control the pandemic resulted in earnings uncertainty. Subsequent monetary and fiscal stimulus disproportionately benefited some areas of the equity market, notably growth, technology and non-dividend paying companies. As a result, dividend-payers lagged the broader market and appear relatively well valued, suggesting high-quality, dividend-paying companies are well positioned.
Dividend-paying companies offer attractive relative valuations, with their P/E multiples trading well below the 10-year average, while non-dividend payers are trading well above their 10-year average. While not all dividend-paying companies are alike, we favor those with sustainable payout ratios, healthy balance sheets and a good track record of capital allocation, including returning capital to shareholders in the form of a growing dividend. The combination of strong capital flexibility and growing dividend payments may help mitigate future inflationary pressures.
As the economy re-opens in this low rate environment, these companies should experience re-accelerating earnings growth while protecting against increased volatility associated with rising rates. Despite the rotation into many lower-quality value and cyclical names, we see opportunities in health care, information technology and consumer discretionary.
Saira Malik is head of global equities at Nuveen.