Dividend stock exchange traded funds (ETFs) have been among the better performing assets this year as investors steered toward value and conservative bets amidst rising uncertainty, and the dividend trade may still have legs.
‘We don’t see strong demand for dividend stocks dissipating anytime soon but suggest focusing on dividend growers,” Richard Turnill, Global Chief Investment Strategist for BlackRock, said in a research note.
U.S. dividend stocks have outperformed the S&P 500 over the past year as ultra-low bond yields and the ongoing low-rate environment pushed investors toward alternative income sources. Year-to-date, dividend-focused exchange traded products have attracted $7.4 billion, or seven times more than the 2015 total.
Even after the outperformance, Turnill argued that dividend growers are still attractively priced at 13.4 times forward earnings. Moreover, quality stocks that consistently grow their dividend streams also tend to be more resilient in more volatile markets, and conditions are looking rockier ahead.
“They have outperformed the broader market during high-volatility periods, our research shows,” Turnill said. “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 Fed rate increase in 2016.”
While high-yield dividend stocks have outperformed within the category, BlackRock analysis shows that high-dividend payers are vulnerable to higher rates. In comparison, dividend growers tend to perform well when the Federal Reserve gradually raises rates.
“They tend to have more rate-resilient characteristics, such as strong balance sheets, and benefits from a growing economy,” Turnill said.