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Dividend Growth is Key

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BlackRock’s Global Chief Investment Strategist Richard Turnill on the importance of dividend growth.

This week’s chart shows how U.S. dividend stocks have outperformed the S&P 500 over the past year, a trend we have also seen in other regions, as ultralow bond yields have intensified the hunt for income.

chart of the week

Year-to-date flows into dividend-focused exchange traded products (ETPs) have reached $7.4 billion, more than seven times the 2015 total, according to our data.

So what’s next for dividend stocks? We don’t see strong demand for dividend stocks dissipating anytime due to low interest rates, attractive dividend yields and aging populations. But we would now look specifically to dividend growers to drive returns.

The insatiable search for yield has driven many income assets to high valuations, but dividend growers are still attractively priced at 13.4 times forward earnings, our analysis shows. These quality stocks with a consistently growing dividend stream also tend to be more resilient in bumpy and down markets. They have outperformed the broader market during high-volatility periods, according to BlackRock research. We see higher volatility ahead, given the risk of a British exit from the European Union, elevated U.S. valuations and the potential for a Federal Reserve rate increase in 2016.

High-dividend stocks have outperformed dividend growers in the past year, but our analysis shows they historically have been vulnerable to higher rates. Dividend growers, by contrast, tend to perform well in a gradually rising rate environment. They tend to have more rate-resilient characteristics, such as strong balance sheets, and benefit from a growing economy.

We like companies with lower pay-out ratios and strong cash flows, at a time when pay-out ratios are historically high. We see attractive dividend-growth opportunities in global pharmaceuticals, international telecom, emerging market (EM) infrastructure and selected information technology companies.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.