HDIV - Looking For Current Income With An Inflation Buffer?
- Equities with dividends >2.5% appear to trade close to their greatest relative discount since the unwind of the tech boom of the late 1990s.
- In the first six months of 2022, the typical 60/40 portfolio declined by double digits, marking the worst performance for this asset allocation mix since 1932.
- Companies paying dividends generally require high levels of cash generation. More importantly, their management teams are typically forced to be disciplined in their capital allocation decisions.
By Sandy Pomeroy
Equities with dividends >2.5% appear to trade close to their greatest relative discount since the unwind of the tech boom of the late 1990s.
In the first six months of 2022, the typical 60/40 portfolio declined by double digits, marking the worst performance for this asset allocation mix since 1932. The main culprit was inflation. Higher interest rates have hurt fixed income markets, and higher discount rates have weighed on equity markets, especially those stocks with high valuations. In the current financial market turmoil, where can investors look to help offset the pressures of inflation? Based on my experience, high-quality dividend-paying stocks could provide a natural inflationary hedge into the next leg of the economic cycle.
Companies paying dividends generally require high levels of cash generation. More importantly, their management teams are typically forced to be disciplined in their capital allocation decisions. As the cost of capital rises with higher levels of interest rates, wider spreads and lower equity valuations (higher cost of equity capital), I believe managements with experience in this discipline should benefit. In June, inflation as measured by the Consumer Price Index ((CPI)) was running at a 9.1% annualized rate, which represents a 40-year high. Given this backdrop, the subset of dividend payers that can actually grow their distributions to shareholders is critical to offset price pressures. In this environment, those stocks with over a 2.5% dividend yield have grown their earnings per share ((EPS)) by over 20% annualized over the past five years. They have grown their dividends by an average of 7.7% over that period, and over 16% in the last 12 months, far outpacing the annualized inflation rate of 4.5% over the last five years. At the same time, payouts ratios have declined as earnings have grown faster than dividends, giving these companies more room to reinvest or continue growing dividends, even during economic slowdowns.
Despite these positive dynamics, as of June 30, the data suggests that stocks with yields over 2.5% appear to trade close to their greatest relative discount to the broad market since the tech boom of the late 1990s. In fact, this group currently trades at a one-standard-deviation discount to the market, down from a three-standard-deviation differential back in January. From a historical standpoint, the last time this occurred, many investors eventually benefitted from a significant valuation rebound-making these companies worth a look for those focused on current and growing income streams to help offset inflationary headwinds.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other "forward-looking statements." Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The "Neuberger Berman" name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2022 Neuberger Berman Group LLC. All rights reserved.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Looking For Current Income With An Inflation Buffer?