Renewed stock market volatility means 2016 could be a fruitful year for dividend-oriented equity strategies.
First, safe, dividend-paying stocks often outperform during periods of market volatility. Nervous investors prefer the “bird in the hand” of dividend payments versus the “two in the bush” of potential price appreciation.
Second, dividend paying stocks are due to outperform following poor performance in 2015. As shown in the adjacent chart, stocks with low or no dividends outperformed last year. This runs counter to the long-term trend of dividend-payer outperformance.
Third, investors may rotate back toward dividend paying stocks as they become less fearful about the Federal Reserve raising interest rates. Investors have been circumspect toward dividend-payers in recent years for fear that higher interest rates would make dividend-payers less attractive. We expect the Fed will struggle to raise interest rates, however, making dividend-sourced income more competitive.