Dividend investors tend to be patient, but lately their patience has been tested.
Dividend stocks have badly lagged the rest of the market recently. The S&P Dividend Aristocrats—a list of companies in the S&P 500 index that have raised their dividends for at least 25 years in a row—have returned less than 10 percent over the 12 months that ended Feb. 29. The S&P 500 gained more than 30 percent over the same period.
A major reason for the recent underperformance is the surge in interest rates that began in 2022. When rates on Treasury securities and cash accounts were stuck below 1 percent, dividend stocks’ yields were attractive by comparison. But with short-term Treasury securities and cash accounts paying more than 4 percent, compared with the S&P 500’s current yield of 1.5 percent, dividend stocks have been a tougher sell. That could change with expected rate cuts from the Fed later this year.
And dividends are far from dead. Meta Platforms, the owner of Facebook, one of the “Magnificent Seven” technology-oriented stocks that have driven most of the stock market gains of the past year, paid its first regular dividend in early 2024. That means the majority of the Magnificent Seven stocks now pay dividends. And more than two-thirds of S&P 500 companies have raised or started paying dividends since January 2023, according to S&P Dow Jones Indices.
As overall stock valuations approach historically high levels, some analysts say that stock price gains can’t help but slow, making dividends a more significant portion of future stock returns.
And don’t overlook the defensive quality of dividends. Thanks to their regular cash payments, dividend stocks tend to be less volatile and serve as buffers during recessions and bear markets. For example, the S&P 500 lost more than 18 percent in 2022, but the Dividend Aristocrats lost only about 6 percent. “With economic growth expected to moderate in 2024, and the potential for recession lingering, dividends may take a more prominent role in driving total returns for investors,” says Diana Wagner, a portfolio manager at Capital Group.
Dividend stocks are not all alike, and interested investors should first figure out what kind of dividend payer fits their needs. Retirees looking for immediate income often focus on companies paying comparatively generous dividends, for example. Those who have a longer time to invest might look for companies with lower current yields but a higher probability of raising their payouts and at a faster rate.
