The Federal Reserve’s first rate hike in years has sparked bond volatility, pushing investors to search for yield elsewhere. Head of Quantitative Strategies Michael Hunstad, Ph.D., examines how high dividend strategies appear to be a good alternative.
Transcript
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Rising interest rates and difficult fixed income markets have prompted many investors to seek additional yield from their equity portfolios. Investing in high dividend strategies may help manage portfolio risk amid rising interest rates and inflation, as dividend stocks are attractively priced in the outlook for dividend growth is improving. Let's take a closer look.
The recent rate hike by the Federal Reserve, the first since 2018, sparked significant volatility in the bond market. The MOVE index, a measure of yield curve volatility, skyrocketed above 110, a 50% increase since the beginning of the year. This has given investors pause, leading them to source income elsewhere. Appropriately designed dividend oriented equity strategies have received a lot of attention lately and for good reason.
In each of the last five interest rate hike cycles, dividend stocks outperform the broad market by an average of more than 12% over the cycle. Historically, dividend stocks have also done well in both high and increasing inflation environments. And this cycle is no different.
With rising rates and higher inflation, dividend strategies have had a strong outperformance in 2021 and year to date. Despite this strong performance, dividend stocks remain relatively inexpensive with average price to earnings multiples of about 17 versus the equity market average of about 23. The recent surge in corporate earnings and profits have improved both dividend coverage and the capacity to grow dividends.
