Investors are pouring shares that pay dividends in an effort to exploit their redemption, after several companies suspended or barely raised payments last year due to uncertainty surrounding the pandemic.
In all two weeks since the beginning of March, there have been net inflows into global dividend funds, reversing months of outflows, according to EPFR data. For the week ending last Wednesday, global dividend funds have raised just $ 675 million.
In North America, the trend has been even stronger: dividend funds domiciled in the United States have not had weeks of back-to-back flows since the end of January. Over the last three weeks of May, funds have raised at least $ 1bn each week, before adding another close to $ 700m for the week ending June 2nd.
“What’s happening here is just a sense of, OK, the cost is clear, we don’t have to worry about dividend cuts, we put our money into income-producing stocks,” said Tony DeSpirito, head of U.S. fundamental active equity investment in BlackRock.
More than a dozen of about 40 companies in the U.S. S&P 500 blue-chip index that had suspended their dividend last year had resumed paying them in late May, according to data collected by Howard Silverblatt, an analyst at S&P Dow Jones Indices. For the rest of the year, Silverblatt predicts that the S&P 500 dividends will “continue to improve,” increasing 5 percent in aggregate throughout 2021. This compares to an increase of only 0.7 percent year-on-year. last.
The performance of dividend-paying stocks has also been on the rise.
The “Dividend Aristocrats,” an index that contains 65 S&P 500 companies that have increased their payroll each year over the past 25 years, is up 16.8 percent this year. It’s more than four percentage points higher than the 12.4 percent overall S&P 500 has earned year to date, and the first time since 2018 that aristocrats beat the broader market.
“It’s a turnaround dynamic,” said Lauren Goodwin, portfolio strategist at New York Life Investments. “As the economy improves, dividend payers tend to do better both in terms of price and in terms of dividends.”
Many companies that pay dividends fall into the “cyclical” bucket of stock that is expected to be among the biggest beneficiaries of the economic recovery. Investors have been betting a lot on those companies, strengthening sectors such as finance and materials.
Companies in these sectors have had strong success this year and the pace of their earnings is not expected to continue, leaving dividends as an important source of returns for investors.
“The capital market rally has seen a strong rebound in earnings this year,” said Colin Moore, global CIO at Columbia Threadneedle. “The dividend is yet to recover.”