Weekly Investment Commentary: Dividend growth: timely and strategic
Bottom line up top:
- U.S. equities may have entered March more like a lamb than a lion, with two consecutive weeks of mild losses, but last week the S&P 500 Index found its roar and leapt to all-time highs. The market’s sunnier disposition was precipitated by last Wednesday’s meeting of the Federal Open Market Committee (FOMC) — the monetary policymaking arm of the U.S. Federal Reserve — even though the Fed’s forecast was little changed.
As widely expected, the central bank kept its fed funds rate in a target range of 5.25%-5.50% for the fifth meeting in a row. The language in its policy statement was identical to January’s, except for one tweak that eliminated a slightly dovish reference to job gains having “moderated” (instead, they simply “remained strong”). Additionally, the Fed’s new dot plot continued to project three rate cuts in 2024, just as it did in December (Figure 1).
Overall, last week’s messaging confirmed higher-for-longer rates. Inflation has remained well above the Fed’s 2% target in an economy that’s proven surprisingly resilient despite the highest interest rates in more than 15 years. The FOMC therefore sees little urgency to begin cutting rates. In our view, the three 25-basis-point reductions anticipated by year-end are unlikely to begin before June.
What accounts for last week’s celebratory response from a market that’s been clamoring for “lower and sooner” rates? In part, we believe it’s driven by the fear of missing out on an expected rally once the Fed finally pulls the trigger. But in a U.S. presidential election year replete with softening economic growth and geopolitical uncertainty, FOMO-minded investors would be well-advised to focus on their long-term goals while considering incremental portfolio allocations to investments with (1) the potential to benefit from economic resilience, (2) the ability to out-earn cash and (3) attractive relative valuations.
“In our view, the three 25-basis-point reductions anticipated by year-end are unlikely to begin before June.”
Portfolio considerations
We remain constructive on higher-quality, dividend growth-oriented stocks. In our view, dividend growth companies tend to be supported by positive fundamentals, sustainable growth potential, healthy balance sheets, ample free cash flow, stable profit margins and management teams committed to returning capital to shareholders. These favorable characteristics may contribute to key advantages, including:
- The potential for income growth: Supported by an improving earnings growth environment, S&P 500 dividends per share are expected to grow by 6% this year, according to FactSet. Many companies have already announced meaningful dividend increases during the first months of 2024, and a few noteworthy mega cap technology companies have started paying dividends for the first time. While dividends have been a smaller component of capital return than share buybacks over the past 10 years or so (Figure 2), they have also been less volatile, providing investors with relatively stable income.
- A hedge against still-elevated inflation: The combination of capital flexibility, balance sheet strength and growing dividend payments could help these companies mitigate inflationary input cost pressures, potentially allowing them to maintain or even expand profit margins — ultimately a plus for shareholders.
At Nuveen, we believe dividend growth-oriented companies are not only wellpositioned for compelling relative performance, but also offer desirable long-term attributes. Over time, companies that initiated or continued to grow dividends have historically generated higher annualized returns with lower annualized standard deviation than all other segments of the equity market, according to Ned Davis Research. While dividend growth companies haven’t outperformed in all market environments, their attractive risk-adjusted returns over the long run make them worthy of consideration as a building block of any strategic equity allocation.
“While dividend growth companies haven’t outperformed in all market environments, their attractive riskadjusted returns over the long run may make them a solid building block of any strategic equity allocation.”
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
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Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
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