The recent resurgence in U.S. stock markets is proving to be a boon for dividend-paying stocks, much to the relief of income investors who have witnessed these stocks lag behind the booming technology sector in recent months. Even amidst a broader market pullback on Thursday, maintaining a focus on higher-yielding stocks appears to be a sound investment strategy.
The Schwab U.S. Dividend Equity exchange-traded fund (ETF) has recently achieved a noteworthy milestone by hitting a new all-time high on Wednesday. This ETF, which tracks a range of high-dividend stocks, saw a significant uptick, marking an impressive eight-day rally during which it gained 6.6%. This performance is notable as it represents the best eight-day stretch for the ETF since November 2022, signaling a strong resurgence in dividend-focused investing.
This recent rally comes as a welcome change for dividend investors who have seen their investments underperform in the face of a broader market surge. Prior to this recent upswing, dividend-focused ETFs had been lagging significantly behind the S&P 500. The Schwab U.S. Dividend Equity ETF, for example, had underperformed the S&P 500 by approximately 30 percentage points up to the start of this week. This trend was not isolated to Schwab’s ETF alone; many dividend-oriented funds have struggled, even those targeting high-quality dividend payers. The ProShares S&P 500 Dividend Aristocrats ETF, which includes over 60 companies renowned for their consistent annual dividend increases, such as Coca-Cola, Sherwin-Williams, and Colgate-Palmolive, has also faced underperformance, lagging by about 40 percentage points since late 2022.
Despite this historical underperformance, dividend-paying stocks present several appealing qualities. In the S&P 500, dividend-paying stocks currently offer an average yield of approximately 2.3%, and are trading at around 25 times their anticipated 2024 earnings. These stocks are projected to experience profit growth of roughly 10% annually over the next few years. On the other hand, the Schwab U.S. Dividend Equity ETF’s holdings yield an average of about 3.7% and are expected to grow earnings at a rate of about 6% per year, trading at roughly 16 times earnings. The Dividend Aristocrats ETF yields approximately 2.4%, trades at around 23 times earnings, and is expected to achieve an annual earnings growth rate of 7%.
One of the main challenges faced by dividend stocks in recent years has been their relative performance compared to growth stocks. Investors have increasingly favored stocks with higher earnings growth potential, particularly in the technology sector. Major tech companies such as Microsoft, Nvidia, and Apple have been at the forefront of this trend, driving significant market gains. These companies, trading at about 38 times earnings and expected to grow earnings at an average rate of 17% annually, have outpaced dividend stocks. Their average yield is around 0.8%, which is comparatively low, making them less attractive to income-focused investors.
Nevertheless, the recent performance of dividend stocks suggests a potential shift in market dynamics. As the Nasdaq Composite has experienced declines, the Schwab U.S. Dividend Equity ETF has been setting new highs, indicating a growing interest in dividend stocks. For investors seeking alternatives, the SPDR Portfolio S&P 500 High Dividend ETF presents an attractive option. This ETF offers a higher average yield of about 4.5% and trades at around 16 times earnings. Despite recent gains, it remains approximately 5% below its all-time high, which may suggest further room for growth.
In summary, the resurgence of dividend-paying stocks in the current market environment presents a promising opportunity for income investors. Following a period of underperformance relative to growth stocks, dividend stocks are beginning to gain traction. With relatively higher yields and potential for continued appreciation, these stocks could offer appealing returns and help balance investment portfolios amid ongoing market fluctuations.