Q&A: Opportunities ahead for dividend investors

12-05-2017

Portfolio manager Linda Bakhshian shares her views on how a still-charging bull market, a Federal Reserve in transition and tax reform may impact dividend-paying stocks.

Q: What’s your take on the current environment for dividend-paying stocks? For most of 2017, the equity market has been dominated by growth stocks. But dividend-growing stocks have done well and have kept pace. These companies are producing solid income for investors and, in some cases, have outperformed the broad market. Importantly, earnings are keeping up, which is a good indicator for future dividend growth.

Q: Will a rising-rate environment affect dividend strategies? When strong economic conditions drive rate hikes, dividend-growing companies and particularly those in the more cyclical sectors—Financials, Industrials and Technology—tend to outperform. That’s assuming gradual rate increases, which we expect will be the case. All signs indicate that new Fed Chair Jerome Powell intends to maintain a fairly measured approach to monetary policy.

Also, dividend-growing companies typically possess a combination of healthy balance sheets and cash flows that enable them to continue funding and raising their dividend payments. Those higher payouts could in turn benefit investors looking to offset impacts from higher rates and inflation.

Q: What about impacts from tax reform? For dividend-focused investors, one potential benefit is repatriation of offshore cash. Currently, companies that repatriate foreign profits pay federal tax at a rate of 35%. Under the new law, that rate is expected to be under 15%. There is good reason to believe that companies will apply that cash to reinvest in their businesses and reassess their capital allocations, including potential increases in dividends paid to shareholders.

Second, corporate tax cuts historically have spurred economic activity. What supports the overall economy, earnings growth, job growth and improving profitability is likely to support future dividend-growth opportunities. It’s true that valuations in the strong-performing Industrial and Tech sectors are no longer cheap, but plenty of investment opportunities remain in these sectors and across the market. That is why performing due diligence on every aspect of a company is essential and staying diversified, nimble and selective is key.

Thank you, Linda.