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February 14th, 2024

Where Do Dividend Stocks Fit Into Today’s Investment Strategies?

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Sydney B. from Tucson, AZ asks: Hello Mitch, with interest rates at higher levels these days, do you think dividend-stock strategies have lost their appeal? Dividend stocks may make sense when investors can’t earn interest on cash, but that’s different now. I’d be interested to hear your thoughts, thank you.

Mitch’s Response:

Thank you for sending me an email, Sydney. There are several insights to glean from this topic, so thanks for asking.

If we look at just the very recent past, it appears that growth sectors like technology – whose companies tend not to pay dividends – have widely outperformed more mature businesses like banks, manufacturers, staples, and utilities where dividends are more common. The technology surge in the wake of the pandemic, combined with growing enthusiasm for AI, has catalyzed this disparity. Somewhat anecdotally, investors pulled $21 billion from dividend funds over the past year, while adding $12 billion to broader equity funds.1

In your question, you suggest that higher interest rates are a key reason why investors have favored growth stocks over dividend-payers recently. But in my view, it’s more about the business cycle and shifts in market leadership, which sometimes take years or even decades to play out. It’s also worth pointing out, however, that dividend stocks have indeed done well over the past several years, just not as well as growth stocks.

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Leading up to 1950, dividends played a much larger role in total return (~80%) for the U.S. stock market than they have over the past decade (~30%). Dividends have also been lower recently, with the average dividend at about 2% over the past 25 years, compared to a long-term historical average of 4.3%.

I think this dynamic could shift again looking forward. As many of the technology behemoths mature and begin to look more like value companies, investors may begin to demand more income in the form of dividends. Lower expected interest rates in the future may also bolster the case for high-quality dividend payers.

From an investment standpoint, an investment’s return is comprised of capital appreciation (or depreciation) plus dividend payments. A stock’s price will go up and down over time, but a dividend payment is always positive once it’s made. What’s more, dividend payments are generally more predictable if an investor scrutinizes a company’s dividend payment history and earnings from quarter to quarter.

At Zacks Investment Management, we look for high-quality companies paying dividends they can sustain and also grow over time. I tend to see a dividend-stock strategy as a middle ground between a fixed-income strategy and a high-growth strategy, part of a diversified approach that can serve to reduce overall portfolio volatility. In this sense, a well-constructed dividend strategy has not lost its appeal – far from it.

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Disclosure


1 Wall Street Journal. February 9, 2024. https://www.wsj.com/finance/investing/can-dividend-investing-rise-from-the-dead-8da3ddfc?mod=djemMoneyBeat_us

2 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.


DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

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