Early skirmishing in futures suggests the S&P 500 may recover a small portion of the 2.6% it shed in just the last two sessions. Big tech has done most of that damage, but a pop for Amazon.com on Friday following its results may halt the carnage, for now.
It’s turbulent times like these when dividend income appears more appealing to many investors. The good news, via a new note from David Kostin, chief U.S. equity strategist at Goldman Sachs, is that S&P 500 dividend per share will grow by 5% for this year.
“Lackluster” earnings growth in 2023 will see dividend per share growth in 2024 ease to 4%, he reckons. Though, that’s not to be sniffed at in a market struggling for upward momentum.
But be careful. High dividend yielding stocks are not necessarily high quality, or as safe as many believe, says a team of analysts at Piper Sandler led by Michael Kantrowitz.
“Sure, a portfolio of higher dividend yielding stocks can provide some margin of safety compared to some valuation metrics, but it can also be littered with value traps too!,” they say in a note published this week.
The chart below illustrates just how much high-dividend yielding stocks have underperformed the top quality factors for the year to date, and the table shows it is the worst of all 118 factors Piper Sandler tracked.
What has caused this poor performance? There have been two significant headwinds for these stocks this year.
“One issue is that bond yields have increased so much that Treasury yields across the curve are above the yield offered on the highest dividend yielding stocks (top quintile),” says Pier Sandler
This will be a new phenomenon for younger investors, because since the great financial crisis the high dividend yield factor has generally provided a greater yield than benchmark bonds.
The other headwind is that dividend yield is a cyclical factor, and this has not been a year where cyclical factors have been outperforming.
“Even though high dividend yield was historically thought of as a more stable trait due to the cushion of the dividend payment, we show that the factor is actually quite cyclical!” says Piper Sandler.
This is partly because dividend changes are business-cycle sensitive. High-dividend yielding stocks are strongly positively correlated with economic growth, which impacts earnings growth trends and thus payouts.
So, the question investors should ask is: How to find the high quality high dividend payers? The answer says Piper Sandler is to analyze stocks by what the broker calls an “ability to sustain.” This is calculated by taking cash flow and deducting preferred dividends and capex, then dividing the result by common dividends.
“Our ability-to-sustain screen aims to help find higher quality companies with sustainable dividends. Year to date, using the ATS screen as an overlay on a high dividend yield screen would have increased returns by 9% vs. just screening for high dividend yield,” says Piper Sandler.
A sample list of high yielding stocks with an ATS ratio of greater than 1, which Piper Sandler deems an attractive dividend payer, includes Altria MO,
U.S. stock-index futures ES00,
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The Federal Reserve’s favored inflation gauge was published at 8:30 a.m. Eastern. The core personal consumption expenditure index for September rose as expected by 3.7% over the previous 12 months, slowing from August’s revised 3.8% increase. The month-on-month reading also came in as forecast, accelerating to 0.3% from 0.1%.
Other U.S. economic data due on Friday include the final reading on October consumer sentiment, due at 10 a.m..
Intel stock INTC,
Shares of Ford Motor F,
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