The dividend story remains the same The dividend story remains the same\images\insights\article\book-coffee-glasses-small.jpg June 28 2023 July 5 2023

The dividend story remains the same

Higher-for-longer rates can be beneficial for dividend strategies.

Published July 5 2023

There’s really not much going on in the high dividend sector of the market. Most companies in this universe report that business is slow, but steady. That means we expect a normal number of dividend increases in 2023, and could see dividend growth in the low to mid single digit range for some companies.

In our opinion, none of this has anything to do with the stock market. There it has been driven by all things Nvidia and AI. Dividend-paying and dividend-growing companies eventually should benefit from any productivity gains associated with this next generation of technology, but it doesn’t influence diaper making or soft drink consumption or utility management right now. In some cases, the flow of money out of dividend companies into the Nvidias of the world has increased yields without impairing income streams. Because dividend yield is calculated as a percentage of a stock’s current price, when income is up and price is down, the yield is increased. For income-oriented investors, this can be a great opportunity.

If anything, in an interest-rate environment that market pundits refer to as “higher for longer,” we’re happy to see what I call higher “risk rates,” the discount rates used by investors when considering investments. While risk rates don’t necessarily move in tandem with market interest rates (the latter being subject to a variety of externalities), higher risk rates have the potential to benefit portfolios of humdrum dividend-paying non-cyclical, established, stable companies relative to investments in higher-risk cyclical, less mature and less stable concerns. True, higher rates have a cash-flow impact on all debt-capitalized companies, but that is a known known. Higher rates also have had a material operating impact on small regional banks, where the net interest margin—the rate gap between what a bank pays for deposits and receives from loans—has been adversely affected. That is also a known known.

As it stands, we think inflation largely has made its way through the python. It appears that we are now lapping the high point of pricing—that is, the ability of companies to pass on higher costs in some cases above what they paid on their inputs—so inflation shouldn’t be a tailwind in the quarters ahead. But within the general context of complex, value-added businesses, current levels of inflation should be manageable and, barring an unforeseen new spike, another known known.

Tags Equity . Inflation . Interest Rates .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Stocks are subject to risks and fluctuate in value.

There are no guarantees that dividend-paying stocks will continue to pay dividends. In addition, dividend-paying stocks may not experience the same capital appreciation potential as non-dividend-paying stocks.

There is no guarantee that dividend income streams will continue to grow in the future or will exceed the income of bonds and other fixed-income investments. In addition, stocks may experience greater volatility than bonds.


Federated Equity Management Company of Pennsylvania