He has reduced his exposure to “high-multiple names,” he says, and instead favors lower-priced dividend growers. Specifically, he likes two energy infrastructure providers: Sempra, a San Diego-based company whose stock has been basically flat this year, and Enbridge, a Calgary, Alberta, company whose shares were down about 13% for the year by mid-November.

However, not everyone is dismissive of growth sectors. “We have a favorable outlook on technology,” says Mike Barclay, lead manager of the Columbia Dividend Income Fund at Columbia Threadneedle Investments in Boston. “It’s a long-term growth sector, and companies have been increasingly focused on returning capital to shareholders via dividends.”

Many tech companies, he says, have strong free cash flow, attractive free-cash-flow margins, low payout ratios, and strong underlying fundamentals—factors which “support higher dividend growth in the long term,” he says. “Stocks that can consistently grow dividends over time typically outperform bond proxies like utilities,” he explains.

Growth Potential
Other sectors enjoy growth potential as well, according to advocates. “Sectors that have been punished in a narrow and momentum-led market will outperform,” says Matthew Wittmer, a portfolio manager at Allspring Global Investments in Minneapolis. “Specifically, we find compelling value in financials, industrials and energy.”

Companies in these sectors, he explains, have been demonstrating long-term fiscal discipline. They are especially attractive now, he says, for their “total return potential,” which he defines as their ability to pay a sustained and increasing dividend on top of the likelihood that they will return capital to investors through stock buybacks.

Yet buybacks aren’t attractive for all dividend investors. “Buybacks suggest a company’s good times were yesterday,” says Simeon Hyman, global investment strategist at ProShare Advisors in Demarest, N.J. “Dividend increases indicate a company’s confidence in the future.”

Jeffrey Buchbinder, chief equity strategist at LPL Financial in Needham, Mass., says, “Dividend growth [is] a better opportunity for earnings-driven appreciation in the coming year than bond-proxy sectors like utilities.”

Even if interest rates fall in 2024, he says, utilities “would likely be a strong performer after lagging so much this year, but may still have a hard time keeping up with the big growth sectors, [which have] the most earnings growth potential.”

Valuation Matters
But rising dividends may not be enough to interest some portfolio managers. “Dividend growth alone is not the only reason we purchase a stock,” says Pranay Laharia, a manager at Barrow Hanley Global Investors in Dallas who works with the firm’s dividend-focused value strategy. “Valuation is a key determinant to the long-term performance.”

Value stocks, he says, are currently at a “historically wide valuation discount” to growth stocks. “The time is ripe for value to start outperforming growth.”