High dividend-paying stocks and related exchange traded funds have been garnering more attention as investors look for ways to sit out the volatility in 2022.
For example, the iShares Core High Dividend ETF (HDV) increased 4.0% year-to-date, compared to the 11.5% drop in the S&P 500.
The strength in high dividend-paying stocks has been unconventional since these types of investments usually do poorly in a rising interest rate environment. Rates typically go up in an expanding economy, and investors would usually forgo steady bond-esque stocks in favor of companies that would deliver higher returns.
However, interest rates are going up this time around in response to four-decade high inflationary pressures, and the aggressive Federal Reserve monetary policy tightening has some worried about a recession.
As more are concerned about a recession, defensive sectors that offer higher yields are some of the areas that have stood out, including utilities, telecommunications, and consumer staples.
“I don’t want high risk. I want a cereal company with a dividend that I know is coming,” Steve Chiavarone, senior portfolio manager and head of multiasset solutions at Federated Hermes, told the Wall Street Journal.
Chiavarone said Federated Hermes has advised clients to overweight dividend-paying stocks, which is the firm’s highest conviction call this year.
The call mirrors other major Wall Street banks, with analysts at Bank of America Corp. and Goldman Sachs Group Inc. also issuing recommendations for clients to invest in dividend-paying stocks.
“Part of the popularity of the high-dividend players has been the ‘nowhere to hide’ narrative in the markets this year,” Art Hogan, chief market strategist at National Securities Corporation, told the WSJ.
Moreover, the dividend-paying strategy is also taking off due to the large exposure to the energy sector, which has been enjoying a stellar start to the year on the surging crude oil prices.
For example, oil-and-gas companies make up around 7.4% of the Vanguard High Dividend Yield Index ETF (VYM), Jack Ablin, chief investment officer, and founding partner at Cresset Capital, pointed out. The energy sector has helped offset some losses in VYM, which is down 2.4% year-to-date.
For more news, information, and strategy, visit the Dividend Channel.