Dividend stocks are showing signs of life, with quality growth names worth consideration as Treasury yields climb.
Advisors can revisit dividend payers on behalf of clients with the Global Dividend Model Portfolio, which is part of WisdomTree’s Modern Alpha series of model portfolios.
“This model portfolio seeks to provide capital appreciation and high current dividend income, through a globally diversified set of WisdomTree’s dividend income oriented equity ETFs. The model strives to deliver dividend income in excess of the global benchmark of equities,” according to WisdomTree.
After last year’s rough spot for dividend equities, the WisdomTree model portfolio is poised for a 2021 resurgence.
“High dividend stocks lagged the S&P 500 by 30%. This trend began well before 2020, with valuations on dividend stocks cheapening over the past four years while broad equities appreciated,” according to BlackRock research. “While history won’t necessarily repeat itself, the last time we saw this big of a performance differential was in 1999. Thereafter, dividend stocks outperformed equities for the next seven years.”
A Dividend-Focused Model Portfolio
Dividend-paying stocks can also help insulate investors from a broad market pullback. That’s particularly true of this model portfolio’s components, which, by virtue of their quality traits, tend to display less volatility in rough markets.
Dividend growth is also meaningful today because payout growers typically weather rising rates. That’s something to consider with Treasury yields climbing.
“We see not only a valuation opportunity but an income one as well. With rates hitting new lows in 2020, many companies’ stocks now offer dividend yields that are higher than their respective corporate bonds yields. Moreover, dividends offer growth potential over time whereas bond coupons are fixed,” adds BlackRock.
Companies are feeling better about returning more of their capital to shareholders. S&P 500 dividends are expected to grow 3% in 2021 from 2020, according to FactSet. The payout ratio—the percent of earnings companies use to pay dividends — is expected to fall to about 35% from 42%, but the pure growth in dividend dollars still provides an attractive yield opportunity at current prices.
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses.
“Combined with our more constructive outlook on economic growth ahead, we have been adding to dividend stocks in our portfolios over the past several months. While we enter 2021 moderately pro-risk, we are staying well-diversified and flexible as we may see bouts of volatility,” concludes BlackRock.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
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.
