If the yield on 10-year Treasury bonds is higher than the dividend yield on equities, the attractiveness of the former increases. Since the 1.7% level last seen in January 2022, the US 10-year yield has climbed above 3.20% and currently stands around 2.89%. After the recent jobs data, the Fed is expected to continue raising rates to cool inflation, which could keep the yield higher. The question remains: are dividend-paying stocks favored in a rising interest rate scenario?
Jeffrey Kleintop, Managing Director, Chief Global Investment Strategist Charles Schwab & Co., Inc. writes in a recent note: “While the yield on 10-year Treasury bonds has exceeded the dividend yield of most stocks in beginning of this year, many investors wrote the idea of focusing on stock returns. But dividend payers have earned attention this year and could continue to reward investors looking for some defense if the economy continues to slow.
Dividend-paying stock prices have shown an upward trend lately. High-dividend stocks have outperformed the broader stock market this year in the US, Europe and Japan, except in July. By holding high-dividend stocks in a portfolio, you get the best of both worlds – upside potential and steady income.
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The S&P 500 High Dividend Index and MSCI Europe High Dividend Index both generated positive total returns for the year through the end of July, while the S&P 500 is down 13% and the MSCI Europe is down 7% (measured in euros). In Japan, the MSCI Japan High Dividend Index is up 13% this year compared to the losses of the MSCI Japan Index (measured in yen).
“History shows us the benefits of focusing on high-dividend payers during recessionary bear markets. In every recessionary bear market of the last 50 years, high-dividend stocks have outperformed the overall market, at exception of the global financial crisis of 2008-09, when financials were forced to eliminate their dividends,” adds Kleintop.
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Stocks with high dividends tend to show lower price volatility and, in times of rising prices, are a good bet against inflation. Companies in the utilities and consumer staples sectors tend to pay much higher dividends than companies in other sectors. Kleintop informs that the four most popular ratios to measure a company’s ability to pay its dividend are – High dividend payout ratio, low dividend coverage ratio, low free cash flow to equity and a high net debt ratio. EBITDA.