Q&A: What's driving dividends in 2018?


As investors contemplate a potentially more turbulent year ahead, we asked portfolio managers Deborah Bickerstaff and Jared Hoff for their outlook for dividend-focused strategies in the U.S. and abroad.

Q: What is the outlook for dividend investing in 2018? On an absolute basis, the outlook is very positive for a number reasons. Impacts from deregulation and tax cuts are supportive. Another aspect of tax reform is the prospect for repatriation of cash that has been parked overseas. 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.

Following a year of historically low volatility, the recent pullback is a reminder that markets can and likely will become somewhat bumpier in the years ahead. Volatility is a normal part of investing. Stocks selected for their high-quality income historically have experienced less volatility during periods of market turbulence. 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.    

Q: Will rising rates have an impact on dividend payments? First, we don’t expect rates to rise in a dramatic fashion over a short period of time. This would negatively impact the broad market, not just dividend stocks. Nonetheless, 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.

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. That’s especially true for companies that provide necessary goods and services—household products, shelf-stable food, pharmaceuticals, telecom services and tobacco—and have pricing power so they can pass higher costs fairly quickly—even daily—to consumers. 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.

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.

Thank you, Debbie.