That’s partly because higher rates on fixed-income securities mean more competition for stocks, particularly those with dividend yields at a premium to the rest of the market, Morgan said.
Investors have become more aggressive about pulling money out of the dividend index, according to Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. Amid a general downtrend for this group relative to the S&P 500 total-return index, its performance also has been marked by lower peaks and troughs, which shows “people are becoming more impatient and selling sooner.”
If the dividend index falls below a March 2012 trough, this will be the next indicator of further deterioration in investor sentiment, Stellakis said.
Poised to Rise
As the U.S. economy moves into later stages of the expansion that began in June 2009, investors need to be “more selective about the type of dividend-paying stocks” they purchase, said Eric Teal, who helps oversee $5 billion as the chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina. There’s a distinction between companies with high-dividend yields relative to the market and those whose payouts may be poised to increase, he said.
“We’re looking for stocks that have growing dividends and have leverage to an economic recovery, especially on a global basis,” Teal said, adding that industrial companies fit this criteria because they’ve expanded payouts in recent years. As a result, signs of strengthening in the U.S. could bode well for these types of equities, he said.
The Dow Jones dividend index has risen almost 25 percent on a total-return, absolute basis this year as U.S. employers have added an average of 188,550 jobs each month, the most since 2005, according to data from the Labor Department. Gross domestic product expanded at a 3.6 percent annualized rate in the third quarter, up from an initial estimate of 2.8 percent and the strongest since the first quarter of 2012, based on figures from the Commerce Department.
Ample Opportunity
Against this backdrop, Kinkelaar still sees ample opportunity for selecting stocks with attractive dividends, particularly those that will benefit from worldwide economic growth, he said, adding that about half the companies in his funds are based outside the U.S.
For domestic businesses, the strategy continues to “largely avoid the most expensive parts of the market” -- including shares that have been hardest hit by the increase in interest rates, Kinkelaar said.