Investors cash in on dividend stocks as recovery gathers pace

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Investors are pouring into dividend-paying stocks in an effort to capitalise on their rebound, after many companies suspended or barely raised payouts last year due to uncertainties surrounding the pandemic.

In all but two weeks since the beginning of March, there were net inflows to global dividend funds, reversing months of mostly outflows, according to data by EPFR. For the week ending last Wednesday, global dividend funds pulled in $675m alone.

In North America, the trend has been even more pronounced: dividend funds domiciled in the US have not had back-to-back weeks of outflows since the end of January. For the last three weeks of May, funds pulled in at least net $1bn every week, before adding another close to $700m for the week ending June 2.

“What’s happened here is just a sense of, OK, the coast is clear, we don’t have to worry about dividend cuts any more, let’s put our money back into income-producing equities,” said Tony DeSpirito, chief investment officer of US fundamental active equity at BlackRock.

More than a dozen of the roughly 40 companies in the US blue-chip S&P 500 index that had suspended their dividend last year had resumed paying it by the end of May, according to data collected by Howard Silverblatt, an analyst at S&P Dow Jones Indices. For the remainder of the year, Silverblatt expects that S&P 500 dividends “continue to improve,” rising 5 per cent in aggregate throughout 2021. That compares to an increase of just 0.7 per cent last year.

The performance of dividend-paying stocks has been on the upswing, too.

The “Dividend Aristocrats,” an index containing 65 S&P 500 companies that have increased their payout each year over the past 25 years, is up 16.8 per cent this year. That is more than four percentage points higher than the 12.4 per cent the overall S&P 500 has gained year to date, and the first time since 2018 that the aristocrats are beating the broader market.

“It’s a turnaround dynamic,” said Lauren Goodwin, a portfolio strategist at New York Life Investments. “As the economy improves, dividend payers tend to do better both in price and of course dividend terms.”

Many dividend paying companies fall within the “cyclical” bucket of stocks that are expected to be among the largest beneficiaries of the economic recovery. Investors have been betting heavily on those companies, boosting sectors such as financials and materials.

Companies in these sectors have performed strongly this year and the pace of their gains is not expected to continue, leaving dividends as an important source of returns for investors.

“The equity market rally has discounted a strong rebound in earnings this year,” said Colin Moore, global CIO at Columbia Threadneedle. “The dividend is yet to catch up.”