The possibility of being in a range-bound market for an extended period of time is unsettling and raises the question of how to rethink the importance of dividends as part of your total returns, posits an article in CityWireUSA. Many on Wall Street have been dismissive of dividends in recent years because they haven’t mattered much, especially since payouts have been depressed since the mid-1990s and buybacks have muddied the waters.
There are plenty of stocks from companies around the world that don’t pay dividends at all, and 25% of those in the MSCI World that were paused payouts during the pandemic, many of which haven’t started back up yet. Those companies that have abstained from payouts have seen disproportionately awful returns, making equity income look like a better strategy. But choosing which dividend-focused strategy to utilize and in what region can be tricky, the article contends. Dividend-focused strategies that are part of ETFs vary widely in quality, as do dividend-paying companies; a 2017 study from Nicolas Rabener of Factor Research found that European and Japanese strategies showed high rates of returns going back to 2000, but when Rabener went all the way back to 1926 using data from Fama-French, returns dropped nearly to zero. Analysts at Society Generale have found “an increasingly wide dispersion in the dividend yields offered by our peer group of funds” inside their long-term baskets of dividend stocks, they told CityWireUSA. They’ve switched their approach to be more laser-focused on “quality” equity income, with “quality” meaning companies that produce stable returns, have solid balance sheets, and carry lower levels of debt.
But creating a realistic dividend strategy in a volatile range-bound market is no easy task, the article maintains. Investors should search for companies that offer dividend payouts over the market rate and that are not only covered by earnings but will also grow over time. Consistency is key, and most of the companies that have a 50-year track record of annual dividend increases are actually U.S. companies, such as PepsiCo and Johnson & Johnson. So while a long-term, range-bound market would be painful, equity income ETFs could do well in that environment. That would be a massive directional shift in the U.S. market from what we’ve seen for the last 10 to 20 years, when dividend strategies and ETFs underperformed, but in this difficult market, dividends from “long-established businesses with great track records and plenty of cash” might be the refuge that investors are looking for