These Two Fund Pros Think Dividend Stocks Are Primed to Prosper

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For dividend investors who have been battered by the pandemic, the new year brings with it a clean slate and hope for a brighter future.

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While many companies that cut their payouts early in the global health crisis have reinstated them, the returns of frequent dividend payers have lagged behind stocks in hot sectors such as technology. That dynamic left some seasoned equity-income managers with solid, but not market-beating, returns in 2021.

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For perspective of the past and possibilities for the future, baron’s Turned to two experienced equity-income businessmen: John Tobin, a managing director and portfolio manager at Epoch Investment Partners, and Tom Huber, T. A money manager at Roe Price. Despite various adversities, both are approaching 2022 with great optimism.

Huber’s Tech

After a 2020 that was dominated by tech stocks, gains spread to other sectors last year, netting $22.4 billion t. Huber, long-time manager of the Rowe Price Dividend Growth Fund (ticker: PRDGX), noted.

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But while the best-performing stocks shifted through 2021, with value ever outperforming, he says, stocks with consistent dividend growth “been lagging behind in many respects.”

Case in point: The Utilities Select Sector SPDR Exchange-Traded Fund (XLU) delivered a 17.7% return last year, which included dividends. It certainly wasn’t a disaster, but it outpaced the S&P 500’s return of nearly 28%.

Another laggard—and a popular destination for dividend investors—was the consumer-staple sector, which returned about 17% in 2021—outperforming the broader market.

Other dividend sectors outperformed, including energy, financials and real estate. The market had “more of a developing, cyclical bias,” Huber says.

Still, he says, “even if you had some areas right, if you didn’t own those cyclical areas—high-volatility, low-quality names—you didn’t perform anything.”

Tea. Rowe was the case for price dividend growth, which returned a shadow of more than 26% last year, placing it in the middle of the Morningstar category, the large-cap mix, meaning it falls somewhere between growth and value. Huber has run the fund since 2000. Its 15-year annualized return of 10.5% puts it in the top 25% of its peer group at that stretch.

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On the plus side, retailers that include Home Depot (HD) and Tractor Supply (TSCO) in their funds returned 60% and 72%, respectively, in 2021.

But his bets on Ross Stores (ROST) and Dollar General (DG) also did not come to fruition. Ross Stores had a return of minus 6%, and Dollar General returned about 13%.

Still, Huber likes his possibilities. Ross Stores suspended its dividend in 2020 at the start of the pandemic, but restarted it during the first half of last year. He called both companies “high-quality, good, sustainable businesses.”

Even as he expects more modest earnings growth this year, after a “great recovery” last year, Huber says the outlook for dividend stocks is good. “A Combination of Slow Income Growth and a Relatively Perfect Multiplier” [for stocks overall] The dividend case should make for a good way for investors to go,” he predicts.

Tobin’s Take

Tobin, whose duties include co-managing the $1.2 billion Mainstay Epoch Global Equity Yield Fund (EPSYX), has a higher value than Huber, and he sees hope for that part of the market.

In 2021, he says, he saw “a market that flipped and flopped” and “it was push and pull during the year” between growth and value stocks. The Russell 1000 Growth Index returned 27.6% last year, slightly ahead of the corresponding price index’s 25.2%. His fund returned 17.4% in 2021, placing it in the middle of Morningstar Peer Group, the world’s largest stock price category.

Value stocks got off to a good start last year, as Covid headlines along with the 10-year US Treasury note yield were a big driver of investor sentiment. The yield topped 1.7% last March, a positive sign for value stocks as investors expressed confidence in an economic recovery. But the yield fell below 1.2% in August, although it has turned higher again.

“We had periods at the beginning of the year when it looked like a reopening business was gaining momentum and value stocks were doing well,” Tobin recalls. And that helped dividend stocks, many of which have value characteristics.

But that outperformance for value didn’t last throughout 2021. “You can almost track what equity-earning stocks did over a 10-year [Treasury] done,” Tobin says. “When 10 years [yield] Backtracked and people were worried about slow growth, which was a headwind for us. ,

Looking ahead, Tobin sees upside for value stocks — and, by extension, dividend names. He frames the price-growth dynamics in the context of bonds, drawing on his background as a fixed-income investor. He refers to companies like Tesla (TSLA), a classic growth story, as long-term stocks that are sensitive to high interest rates. Conversely, he considers Toyota Motor (7203.tokyo) to be a short-term stock, which is more of a value name.

Why? “Valuations for a company like Tesla are based on the expectation that in the years to come, revenue, earnings and cash flow will continue to grow faster and much larger than they are today,” he says. In contrast, Toyota has “not the growth trajectory that Tesla has today” and is less sensitive to higher interest rates than that argument, which the Federal Reserve indicates are coming.

“That’s not to say that these aren’t good businesses with great prospects,” he says, referring to Tesla and other higher-period stocks. But “growth stocks are almost by definition long-term stocks versus value stocks.”

If there is a sustained run in value stocks, he believes it will be a good tailwind for dividend stocks and dividend investors.

Write Lawrence C. Strauss at [email protected]

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