I'm Daniel Peris, Senior Portfolio Manager at Federated Hermes.
Are dividend-paying stocks out of favor?
Dividend stocks have been out of favor actually for around five years. I could argue as an academic it's been about 30 years, coming up on 40 years. But as a practical matter for investors looking for a combination of both income from the stock market, which has been challenging for the last several decades, not just the last few years but the last several decades, and an attractive relative total return the way people often kind of play the stock market (that's an important distinction we can return to) dividend-paying stocks have been out of favor really since the middle of 2016. There have been some sparks and zigs and zags and signs of light over the last several months. But from the middle of 2016 until not that long ago, dividend-paying stocks and dividend-focused portfolios, although they might've been delivering on their income mandates, were not necessarily very popular or in favor in terms of just share acquisition, share prices, and relative total return.
How has the outlook for dividend stocks changed in recent years?
Well, it's precisely because dividend-focused investments have been out of favor for the last five years, roughly speaking, that their current attraction's really almost off the charts. We use a variety of metrics that are both proprietary and third-party that any investor can see. And dividend-paying securities, those that are at the high end of the dividend-paying spectrum, not just plain dividend-paying securities but those that really deliver a meaningful income stream, have relative valuation metrics right now. And it doesn't matter whether we're recording this on a particular day, on a particular Tuesday, or the third of the month or the 20th of the month, because these trends tend to last for months. But right now, meaning this several month period, those relative attraction metrics are extremely high. Again, being out of favor for five years is actually hard to do. And that makes the attraction metrics, the valuation metrics going forward, extremely attractive, something that we are quite happy to bring to the attention of current and prospective clients. I do want to separate that from the income-generating element of the equation. The income-generating part of the dividend-paying securities, other than a blip last year in 2020, a very understandable blip, really hasn't changed that much, meaning those investors who do seek income from the stock market, and I have to acknowledge that's a minority of investors, their experience hasn't really changed dramatically over the last five years. But from a relative total return, it's getting close to table-pounding metrics right now.
Disclosure: Views are as of July 16, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investments are subject to risks and fluctuate in value. There are no guarantees that dividend paying stocks will continue to pay dividends. In addition, dividend paying stocks may not experience the same capital appreciation potential as non-dividend paying stocks. Past performance is no guarantee of future results. Federated Equity Management Company of Pennsylvania 21-30332 (7/21)