By mid-november 2023, the S&P 500 had advanced nearly 15% for the year. That performance was largely driven by a handful of growth stocks in the tech and travel and leisure sectors.

But for investors who favor stocks that pay dividends, it’s been a tough year, thanks partly to rising interest rates. Experts say that’s about to change.

“2023 has provided a challenging backdrop for dividend-paying companies,” says Tom Huber, portfolio manager of T. Rowe Price’s Dividend Growth Fund and Dividend Growth ETF. “As of the end of Q3, non-payers outperformed dividend payers by 26%. … However, this is providing us significant opportunity in dividend-growth companies, which we believe can continue to compound value over the long term—and many of which are trading at only market-like multiples or less.”

In other words, these stocks are undervalued. “There are attractive, relatively high dividend-paying stocks in most sectors,” says Eric Beyrich, chief investment officer at Sound Income Strategies in New York City.

He cites telecom giants like AT&T and Verizon, as well as Omnicom Group and Interpublic Group, two New York-based communications-services providers. He also mentions consumer staples such as Molson Coors Beverage Co. and Chicago-based packaged-food producer Conagra Brands.

“The way to find [such opportunities] is to look at the areas that have underperformed the most, on a price basis, as that tends to lift the yields,” he explains. “Then look for companies with scope for improvement.”

Beyrich is not alone in his view on the market overall, though different investors have varying views of the particulars.

Defensive Sectors
“As a result of the stock market’s flight to riskier assets this year, which came about on expectations of a soft economic landing, many defensive sectors are now offering attractive relative valuations,” says Burns McKinney, portfolio manager of the Virtus NFJ Dividend Value Fund. “These sectors also offer attractive yields.”

At the same time, he says, the industrials sector offers “solid dividends and secular tailwinds.” Infrastructure spending by government programs is ramping up, he adds, and geopolitical uncertainty favors rising defense outlays—two trends that should benefit industrial companies.

Michael Clarfeld, a portfolio manager at ClearBridge Investments in New York City, shares a similar sentiment. “Some sectors that have sold off in 2023 as interest rates rose look attractive right now,” he says, singling out so-called bond proxies such as utilities, REITs and energy infrastructure companies. These have “come under some knee-jerk selling pressure as investors extrapolate the consequences of higher rates,” he says.

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