Amid market malaise and economic uncertainty, a couple of portfolio managers this week reminded investors about the potential of dividends in helping.
Dividend stocks have been good investments, say adherents, because they have generally outperformed the S&P 500. They provide two sources of return: The first is through regular income that comes from dividend payments, and the second is through the capital appreciation of the stock prices.
On Thursday, Caroline Randall, and Paul Benjamin, equity portfolio managers at Los Angeles-based Capital Group, spoke at the firm’s monthly webinar. During the presentation, entitled “Finding Value in Volatility,” Randall said dividend-paying companies will likely shine in the current environment.
“I really believe that we are at the start of what is going to be a renewed and significant and durable appreciation of the important role that dividends can play in your portfolio,” she said.
In a period of narrowing equity markets with slower growth periods, Randall said dividends can serve as an important stabilizing mechanism because they offer both downside protection and capital appreciation.
Benjamin agreed, saying that prices for high-dividend-yield stocks are at their lowest in years. In fact, the only other times prices have been this low were during the early ’90s and at the peak of the dot-com bubble. Such stocks offer a perfect combination: higher yields and lower prices, giving them a shorter duration, which is ideal for the current market, Benjamin said.
He asked the audience to think about the way rising interest rates affect bonds. “When you have a rising interest rate environment, you want to be in shorter-duration bonds and … shorter-duration stocks, so that will favor dividend yielders as well."
As for picking companies, Randall looks for those that grow earnings and dividends at a sustainable level. And they must have good pricing power to accomplish that.
She cited the pharmaceutical industry as a potential source of good dividend payers, since these companies have strong balance sheets and cash flow and can price through inflation. They can also keep growing their dividends in an inflationary environment (like the current one).
There are also dividend opportunities to be found in tobacco companies, which Benjamin said can earn up to almost 10% in dividend yield, as well as gold stocks. The latter are interesting, he said, because gold traditionally does well when real rates (which are current interest rates minus inflation) are really low. They are currently at negative 6%.