Inflation may be hurting the broader market, but it also indicates that stocks paying high dividends can perform well.
Both the consumer-price index and the producer-price index showed increases that were faster than expected this week. Each of the three major U.S. indexes dropped at least 4% from record highs hit within the past month. The fear is that high inflation will force the Federal Reserve to lift interest rates soon. Higher rates reduce the current value of future profits, which brings stock valuations lower.
The flip side is the benefit for stocks paying big dividends. They have outperformed low dividend payers by just under 9 percentage points year to date, according to Evercore data. Citizens Financial Group (ticker: CFG), a component of Evercore’s Sustainable Dividend Growth portfolio, has risen 40% this year. It has a dividend yield of more than 3%, far more than the 1.63% on 10-year Treasury debt.
Mondelez International (MDLZ), meanwhile, a portfolio component with a 2% dividend yield, is up just 7% year to date.
That Citizens is outperforming Mondelez isn’t a surprise. The pattern follows historical trends: There is a close correlation in the last decade between the direction of inflation expectations, the 10-year Treasury yield, and the relative performance of high-dividend stocks, Evercore’s data show.
It matters because the investment bank’s data also indicate that expectations for inflation and bond yields are both high enough that high- dividend stocks can keep outperforming low payers from here.
There are two core reasons. When bond yields rise, investors who want an acceptable yield on income investments seek out shares with higher yields as a home for whatever money they have available for equities. Companies paying higher dividends fit the bill, so they can attract extra buying interest that lifts their prices.
But more important, many companies paying high dividends are those that stand to gain the most from a strengthening economy, the force behind the fear of inflation that drives bonds yields higher in the first place. Traditional value stocks account for a bigger share of high dividend payers in the S&P 500 than any other style of stock, according to Evercore.
Value stocks have had a strong 2021. And during three of the four major periods when value stocks outperformed growth in recent decades—2016, 1992, and the early 2000s—companies with high dividends outpaced those offering less, according to Cirrus Research.
Just keep watching the economy and inflation.
Write to Jacob Sonenshine at [email protected]
