C. J. Lawrence Weekly – Dividend Growers Provide Stability in Choppy Markets
It’s difficult to identify a singular catalyst for the market’s recent volatility. Whether it’s politics, trade, or corporate stumbles, the equity markets’ reaction to events and news has been swift and pronounced. The large intraday swings in stock prices suggest that traders are shooting first and asking questions later. Among the primary reasons cited for last week’s swings are; increased fear of rapid rate hikes by the Federal Reserve, the escalation of trade rhetoric between the U.S. and China, and the abdication of technology sector leadership. It’s difficult to calculate how any of these singular issues, in isolation, could cause significant market turmoil. But in combination, and along with other macro concerns, these uncertainties are causing the market serious indigestion.
On the interest rate front, considerable analysis went into recent comments by the new Federal Reserve Chair, Jerome Powell, which were viewed by some as being incrementally more hawkish than previous comments. Our sense, however, is that the markets have previously calibrated the expectation for three more rate hikes in 2018, and that Chair Powell’s recent comments did little to change that expectation. Meanwhile, the US-China trade spat is an important new development for the market to digest, but there appears to be adequate time for debate and détente before proposed tariffs would be enacted, and it is unclear what the ultimate impact would be on trade, inflation, and GDP. While the U.S is a major importer of Chinese goods, only 3.7% of S&P 500 constituent sales are made in China. That share figure is down 13.1% from 2016, with the biggest one-year share gainer being Canada, with a 13.5% improvement. A new NAFTA deal, if one materializes, could potentially help off-set reduced S&P 500 company sales in China. Finally, the technology sector did, in fact, lose ground over the past two weeks and has ceded the sector leadership position it has held for much of the past two years. But its anticipated demise may be premature. Technology remains one of only two S&P sectors with positive year-to-date performance, with the Software and Communications sub-groups holding positions in the top 10 performing groups for the year.
Regardless of catalysts, the recent market volatility has made investment strategy selection increasingly challenging for investors and managers. Growth versus value comparisons have broken from historical patterns as market downdrafts have been equally punishing. But the dividend growth strategy, which looks to have fallen out of favor in early 2018 on a relative basis, may warrant another look. Most conventional dividend growth indices are market capitalization weighted so may paint a different picture from what is happening across a broader swath of dividend growers. We screened U.S. listed stocks with market values exceeding $5 billion, for companies that have raised their dividend more than 15% every year, for the past five years. Our equal weighted index of qualifiers has outperformed the S&P 500 Index by 3.1% year-to-date, and by 5.0% since February 1. Improving fundamentals and corresponding increases in corporate cash flow should help dividend payors maintain and increase payouts to shareholders in 2018. Shares of companies with track records of consistent and meaningful dividend increases, look poised to outperform in 2018 and deserve a meaningful weight in both growth and value portfolios.
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