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AAM Viewpoints – Why Dividends Now?

Key Takeaways:

  • Equity yields are currently attractive relative to fixed income yields
  • Strong recent and forecasted earnings growth may provide a solid foundation for future dividend growth
  • Global dividend and dividend growth strategies are potentially attractive investment opportunities

We believe dividend yielding stocks are an attractive investment, as their yields have caught up with many fixed income asset classes. With the recent rebound in earnings, companies may have an even greater capacity to grow their dividends in the future.

Equity Yields Have Caught Up to Fixed Income

Equity yields have closed the gap with bond yields and in many cases have surpassed them. The dividend yield for the S&P 500 Index, a barometer for large U.S. stocks, was 2.0%. This is on par with the 2.4% yield of the Bloomberg Barclays U.S. Aggregate Index, a proxy for the broader fixed income market, and the 10-Year U.S. Treasury yield of 2.1% (as of August 31, 2017). Looking globally, the 2.4% dividend yield of the MSCI World Index (a barometer for large global stocks) is higher than yields on the government bonds of all the developed (G-7) countries (see chart below).

Source: Bloomberg, HIMCO, as of August 31, 2017. Past performance is no guarantee of future results.

Earnings Growth Has Returned With Vengeance

After no earnings growth over the last two years and at best single digit earnings growth over the last five years, earnings grew more than 12% in the second quarter of this year. Earnings are now expected to grow 12% for the remainder of the year and another 11% next year (see chart below). With strong earnings growth and record cash on company balance sheets, companies may find it much easier to grow their dividends in the future.

Source: Thomson Reuters, HIMCO Analysis, as of August 31, 2017. Past performance is no guarantee of future results.

Global Dividend and Dividend Growth Strategies Have Outperformed and Are Poised to Continue

We believe stocks which are part of these two trends can be attractive investments. We believe global dividend and dividend growth stocks have a promising future. In fact, these stocks are already outperforming their counterparts (see charts below), and we expect the strong global yields and solid earnings growth to help continue this outperformance.


Source: Bloomberg, HIMCO, as of August 31, 2017. Past performance is no guarantee of future results.

 

CRN: 2017-0905-6130R

AAM is not affiliated with The Hartford Financial Group, Inc. or HIMCO, and was not involved in the preparation of this article. The opinions expressed herein are solely those of HIMCO, and do not necessarily reflect those of AAM.

Hartford Investment Management Company (HIMCO) is a SEC registered investment adviser subsidiary of The Hartford Financial Services Group, Inc. SEC registration does not imply a certain level of skill or training; nor does it imply that the SEC has sponsored, recommended, or otherwise approved of HIMCO.

The forecasts, opinions and estimates expressed in this report constitute HIMCO’s judgment as of September 6, 2017 and are subject to change without notice based on market, economic and other conditions. The assumptions underlying these forecasts concern future events over which we have no control. The assumptions may turn out to be materially different from actual experience. There can be no guarantee that any target or forecast will be realized.

Investment Risks: All investments involve risk, including the possible loss of principal. Dividend Payment Risk: An issuer of a security may be unwilling or unable to pay income on a security. Common stocks do not assure dividend payments and are paid only when declared by an issuer’s board of directors. The amount of any dividend may vary over time and a company currently paying dividends may cease paying dividends at any time. Foreign Investment Risk: Investments in foreign securities involve risks beyond those inherent in domestic investments. These risks are magnified in emerging markets. Small & Mid-Capitalization Company Stocks: Investments in small and mid-capitalization companies may involve a higher degree of risk and volatility than investments in larger, more established companies

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.