With volatility set to be on the agenda for the foreseeable future, many investors are taking a step back and reassessing their positions. Dividend-centric strategies are particularly popular with certain investors and Debbie Bickerstaff, portfolio manager at Federated Investors, thinks recent deregulation and tax cuts are helping create a positive environment for dividend investment strategies.
“Another aspect of tax reform is the prospect for repatriation of cash that has been parked overseas,” said Bickerstaff who manages the Federated Strategic Value U.S. Equity Dividend Fund. “Each of these factors supports companies’ abilities to cover their dividend obligations and increase future dividend payments. However, on a relative basis, there's a slight caveat. If we see a continuation of a "risk-on" trade in the U.S. market, it is likely that dividend investments—while still positive—would lag the more growth-oriented sectors such as tech, information technology and consumer discretionary.”
Bickerstaff believes the recent pullback is just the beginning of a period of bumpier times in the markets. Despite enjoying a period of calm, investors should not forget that volatility is a normal part of investing and should build plans based on that premise.
“Stocks selected for their high-quality income historically have experienced less volatility during periods of market turbulence,” Bickerstaff said. “Their relative stability has been attributable to their strong, mature business profiles, along with their solid balance sheets and ample free cash flow generation. Such reliable business models have enabled these companies to prudently increase their dividends over time.”
The Federal Reserve Bank has signalled its plans to continue normalizing interest rates, although Bickerstaff is not expecting rates to rise in a dramatic fashion over a short period of time, which would negatively impact the broad market, including dividend stocks.
“Dividend-paying stocks are often viewed as a lightning rod in a rising-rate environment, so it’s important to distinguish between short-term effects for individual companies versus long-term overall effects,” she said. “Short-term, hedge funds and traders tend to pull away from dividend-paying stocks on any announcement of a federal funds rate hike. But longer term, a return to a more normalized rate environment is healthy for the economy, the market and for dividend-paying companies.”
Normalized interest rates are particularly favourable for companies that provide goods and services, like household products, pharmaceuticals, telecom services and tobacco, and have pricing power to pass higher costs.
“Consumers can put off spending on fashion and tech gadgets, but need to buy soap, tissues and food staples and fill prescriptions, use the internet and keep the lights on even when the economy slows,” Bickerstaff said. “Also, over the past five to seven years corporations, including dividend-payers, have taken advantage of the low-rate environment to finance debt."
"They will continue to benefit from those low financing costs for some time to come. So we believe that solid, mature, long-time dividend-oriented companies will do just fine in a rising-rate environment.”
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