Cash is king now. The latest evidence: the market’s embrace of dividend-paying stocks compared to other long-time favorites, companies that do buybacks.
Investors Rush to companies that promise regular payments To shareholders, a sign of Wall Street’s thirst for cash as the Federal Reserve raises interest rates and major stock indices struggle.
They are turning to companies like
The cigarette maker
As the broader market continues One of its most volatile extensions from the last decade. Concerns about high interest rates, too high inflation and slowing growth have turned the stock market upside down, prompting many investors to abandon the big companies that have dominated over the past decade — companies that often don’t pay dividends or are just small.
Corporate executives who opted to buy back shares and pay large dividends are often rewarded by shareholders in the 20 years leading up to the Covid-19 pandemic. Recently, there has been a difference.
Since the start of 2020, companies paying high levels of dividends have continued to outperform those with lower payouts, while stocks of companies putting the most money into share buybacks have lagged behind those with least buybacks, according to For Credit Suisse Analysts.
Max Wasserman, founder of Miramar Capital, which oversees stocks of dividend-paying companies, including
Which boosted its returns to investors this year.
This shift explains the premium that investors pay for a fixed cash payment rather than the promise of future profits. This preference only intensified when the Federal Reserve embarked on an ambitious campaign to raise interest rates to curb inflation. High inflation and high interest rates Erosion of future corporate profits With the increasing attractiveness of cash today.
An exchange-traded fund aimed at investing in companies dumping a lot of free cash, the Pacer US Cash Cows 100 ETF, is up about 2% this year, while major indexes have posted double-digit declines.
Many of the stocks with the highest dividend yield in the S&P 500 were skipping over the broader market. AT&T shares are up 12% this year, while Altria Group shares are up 10% and pipeline operator shares are up.
They added 8.2%. All three stocks have dividend yields above 5%, according to FactSet. The benchmark index fell by 17% in 2022 and it was Swinging on the edge of a bear market.
Companies in the S&P 500 paid a record $137.6 billion in profits in the first quarter, according to S&P Dow Jones Indexes, and chief index analyst Howard Silverblatt expects to set a new record in the current quarter.
The S&P 500 high dividend yield index is up 2.8% in 2022, while the S&P 500 buyback is down 12%.
Dividend stocks weren’t always a star performer. In recent years, many investors have piled into highly rated companies, many of which have made big payments in the future rather than now. This year, many of those bets Orchestrate a reverse turn and burden the wider market. Investors said the free cash offered by dividend paying companies is more valuable to them now because interest rates are higher.
John Augustine, chief investment officer at Huntington Private Bank, said his company’s stock strategies have been adding dividend-paying stocks in recent months, to the point where each has a higher dividend yield than its benchmark.
“We don’t know what the Fed is going to do next year, so I want the cash now,” Augustine said.
The craving for cash today is evident in the widening performance gap between large-cap US stocks with the highest dividend yields and those without.
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Shares in the Russell 1000 with the highest dividend yield on November 19, 2021, rose by an average of 4% over the next six months, according to Bespoke Investment Group. Shares of the Russell 1000 without a dividend have fallen an average of 29% during that time.
Giorgio Caputo, director of the JOHCM Global Income Builder Fund, said he favored energy companies recently, due to the potential for increased earnings. In addition, he made adjustments to his portfolio due to rising inflation and higher interest rates.
“It’s about a 180-degree change from what we’ve seen over the past decade,” he said.
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