“In a year of rising interest rates, resurgent stock volatility and creeping political risk, many investors are taking solace in dividends,” says a recent article in The Wall Street Journal.
As the market becomes increasingly unsettled, the capacity of companies to shell out cash in the form of share buybacks and dividend payments is becoming of key importance to investors, the article says. This is further fueled by the fact that U.S. companies are enjoying the benefits of the recent tax cut, leaving investors “increasing willing to count on corporate largess to generate better returns.”
According to JPMorgan research, the article reports that, “among big listed companies in the U.S. and Europe, about 71% and 83%, respectively, are expected to increase dividends in 2018, the highest share in at least a decade.” The same research shows that share buybacks are also expected to increase in the U.S. to $800 billion in 2018 from $530 billion last year.
FactSet forecasts reflect that the most rapid dividend growth this year is expected from technology, finance and energy stocks which, the firm notes, haven’t been consistent dividend payers. According to firm analysts, this is because of strength in the global economy and the fact that these sectors are “sitting on large piles of cash, which sends an optimistic message for the broader stock market.”
Higher inflation, the article explains, “makes stocks that pay out more attractive because money placed in banks or bonds will lose value overtime, whereas dividends often rise to match big increases in consumer prices. That happened in the 1970s and early 1990s.” Some investors, however, are concerned that the boost in dividends is only temporary. The article cites comments from Federico Riggio, a portfolio manager at Kairos Group, who says his firm is more apt to short stocks with high dividend yields. “People tend to price more in the short-term the value of what is distributed and not the value of growth,” he argues.