Dividends Stocks Are Back In Favor Once Again…
How many of you remember the 1999 film She’s All That?
It’s a modern twist on George Bernard Shaw’s 1913 play, Pygmalion. The plot involves a cruel bet made by a popular high school athlete who claims he can turn any girl on campus into a prom queen in six weeks. He targets a plain, socially awkward art student named Laney.
Naturally, the bet is exposed and backfires spectacularly. But in the end, the invisible Laney was indeed transformed into the belle of the ball. She only needed to let her hair down, lose the horn-rimmed glasses, and trade baggy overalls for a sheer red dress. Suddenly, the hidden beauty within was finally revealed for all to see.
We’ve seen this tale play out in the market this year, casting dividend stocks in the starring role.
Dividends Are Cool Again…
So simple and unappealing in the eyes of many. Dividend payers have been seen as dull and bookish, not shiny and alluring. In financial parlance, they have been out of favor and overlooked. IBM may be brainy, but it hasn’t been sitting at the lunch table with Facebook, Apple, Netflix, and the rest of the “in” crowd.
Value has consistently been outshined by growth for well over a decade. Statistically, that’s an aberration. A dangerous one, at that. The S&P 500 is market-cap weighted, so a handful of behemoths have had an undue influence on returns. And with trillions upon trillions flowing into index funds, valuations for the popular clique became untenable.
That wasn’t a problem in 2020 when the pandemic fueled massive gains for the tech sector. The Nasdaq soared 44% that year, crushing the mild 7% return for the Dow Jones by a six-to-one margin. But a day of reckoning was coming.
Let me repeat a warning from the September 2020 issue of High-Yield Investing.
Tech stocks now account for a heavier S&P weighting than utilities, energy, real estate, and consumer staples combined. I tend to be leery of narrow market leadership, as it often foreshadows market corrections. The five largest stocks now represent more than 20% of the index, exceeding the former high of 18%. Care to guess when that last peak occurred? March 2000, just before the dot-com crash.
That prediction didn’t happen right away. In fact, giddy tech investors continued to watch their shares rally for another six months. But as the world began to emerge from Covid hibernation, market sentiment suddenly started to shift in a big way. The Nasdaq 100 shed more than $7 trillion in market value last year.
This shift has continued in earnest throughout 2022, thanks in no small part to the Fed’s aggressive rate tightening cycle. Money has rotated out of debt-fueled growth stories and into reliable cash generators. The good-old Dow Jones, once scorned, has held its ground this year, slipping just 7%. Meanwhile, the S&P has dropped 17%, and the Nasdaq has plummeted nearly 30%.
According to the Wall Street Journal, the Dow hasn’t beaten the Nasdaq this soundly since 2000. And the point differential between the Dow and the S&P is the widest since 1933. Credit unglamorous names like Coca-Cola and Caterpillar. But smaller value stocks are turning heads as well.
The S&P Value ETF (NYSE: SPYV) has rallied 21.3% over the past two years, doubling the 10.9% return of its growth counterpart (NYSE: SPYG). Just like Laney, the student body of investors is finally seeing dividend-paying value stocks in a new light. The “ugly” duckling has become the swan.
All I can say is, over at High-Yield Investing, we knew it all along.
That’s why I created a special report about 5 “bulletproof” dividend payers you’ll want to own for the long haul.
These picks have weathered every dip and crash over the last 20 years and STILL handed out massive gains. And each one of them carries market-beating yields, with payments that rise each and every year.