Dividends are not confined to a specific investment style. At the sector level, cyclical, defensive, and economically sensitive assets are all home to dividend-paying stocks.
However, there’s often an assumption that cyclical value stocks are a fertile group for dividends. That thesis has some validity to it, indicating the T. Rowe Price Dividend Growth ETF (TDVG) could be an avenue for investors looking to play the value rebound while accessing payout growth.
Two of the primary sector drivers of value’s 2021 rally are energy and financial services – two groups that were dividend disappointments in 2020. Due to slumping oil prices caused by the onset of the coronavirus pandemic, energy was one of the epicenters of negative dividend action last year.
Likewise, the pandemic prompted the Federal Reserve to force banks to set aside more capital to cover bad loans, essentially halting plans for buybacks and higher dividends in the process.
Fast-forward to 2021, and consumers are paring down debt, confirming the bad loan scenario wasn’t as dreadful as originally expected. With those factors in mind, it’s possible that the payout floodgates for banks open in the coming months, turning a value sector into a dividend growth destination, too.
In a sentiment not limited to financial services stocks, some market observers see the current set-up for value dividend payers as favorable, citing higher valuations on growth sectors that could temporarily limit broader market upside.
There’s also the belief that some defensive dividend groups still offer potential upside. For example, utilities is one of the highest-yielding sectors, and is certainly not thought of as growth idea. However, its leverage to the green energy boom may be going overlooked, and its yields are tempting in today’s low income climate.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
