Why should investors still consider dividend investing?
Senior Portfolio Manager Daniel Peris outlines the reasons why investors should consider dividend investing even as rates rise and other income sources become attractive.
- Some of the most traditional dividend-producing sectors, such as Health Care and Utilities, are still good options for investors.
- For those with long-term investment horizons, rising rates likely won’t overly diminish the attractiveness of growing dividends.
- Focus on steady GDP growth and consumer health to evaluate a stock’s potential for dividend growth.
I'm Daniel Peris, Senior Portfolio Manager and head of the Strategic Value Dividend Team.
In which sectors do you see opportunity for dividends?
Dividend-seeking investor in the US market really is presented with a fairly stable opportunity set and it's been in sectors that have been offering income streams for quite some time. They include consumer staples, large cap healthcare, integrated energy, telecom and utilities and then a smattering of company-specific opportunities in other sectors but those are the main areas where we have, are presently and likely continue finding opportunities for dividends.
As rates rise and other income sources become more attractive, why should investors still consider dividend investing?
The reason for people to own equities in a period of rising rates is for the prospect of a rising income stream. Now it is true that when certain investors perhaps with shorter time horizons, a few months, a few years. If rates do rise sufficiently that money market funds or other fixed income investments are attractive, it would be perfectly reasonable for them after a decade long period of ultra-low rates to migrate into instruments that are higher in the capital ladder. But for longer term investors, even with rising rates, equity yields and the prospect of growing dividends should remain attractive.
What do you see as investors' biggest concerns? How can they mitigate these risks?
Now I don't know that there's a single concern that investors have. It really varies by client and some of them look at politics of the day, others look at interest rates. We tend to focus mostly, just because of the nature of the way that our portfolios are set up, at consumption and GDP, the level of the economy, of how the consumer is doing, basic economic factors rather than say stock market factors or extra market factors like politics. GDP, specifically consumers' health have been remarkably steady, if anything looking up a bit lately but really quite steady over the last several years. Consumption not getting materially better but also not deteriorating.
Views are as of September 6, 2018, 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. 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. Federated Investment Management Company. 18-75967 (9/18)