Dividend paying stocks have lagged the high-growth technology stocks related to AI over the past couple of years, but we started to see a reversal in the third quarter. What can you tell us about the opportunity for dividend payers going forward?
Dividend stocks tend to zig when the broad market zags, and vice versa. In 2022, many dividend stocks were down mid-single digits, while the S&P 500 was down 18%. Since the beginning of 2023, it has been a very strong market environment led by technology stocks, the NASDAQ 100, and the S&P 500, while many dividend stocks lagged. In fact, from the beginning of 2023 through the first half of this year, so six quarters, many dividend stocks were up only low single digits, and that compares to the S&P 500, which was up 45%, and the NASDAQ 100, which was up 82%. On an annualized basis, that’s 29% annualized for the S&P 500 and 49% annualized for the NASDAQ 100, compared to just 1% annualized for dividend stocks (1). In the third quarter, that performance gap began to narrow, many dividend stocks were up double digits, and we think there’s a tremendous opportunity going forward. The reason we feel that way comes down to valuation. We think dividend stocks are much more attractively valued than the broad market. Our preferred measure of valuation is looking at the relative dividend yield of a stock or a portfolio and comparing it to the S&P 500 dividend yield. A stock is attractively valued when the relative yield is at the high end of its historical range. We’re seeing across the dividend investing landscape that many stocks are trading at all-time high relative dividend yields compared to the S&P 500. The last time there was such a large performance discrepancy between dividend stocks and the broad market was in the late 1990s. In the subsequent one, three, and five year periods, dividend stocks performed much better than the broad market, and we think there is a similar opportunity unfolding this time.
Can you give us an example of a stock that fits your relative yield and quality criteria?
ConocoPhillips is an exploration and production company in the energy sector. That stock is down 5% this year, while the S&P 500 is up over 21%. However, our thesis on ConocoPhillips is playing out as expected. The company just reported a strong quarter, with production exceeding guidance. They raised their production range for the full year while keeping costs contained, which we think is really important. It suggests there is good industry discipline. The company has a three-tier plan for returning capital to shareholders through stock buybacks, ordinary dividends, and special dividends, and it has an A-minus rated balance sheet by Standard and Poor’s, indicating that it is a very high-quality company. The stock yields 3.1%, which is 2.3 times the S&P 500 dividend yield and at the high end of its historical range. We’re using what we believe is short-term weakness in the energy sector to add to our position in ConocoPhillips.
(1) Source: Bloomberg