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Published on Oct 11, 2016
High
dividend-paying stocks may be enticing, but it's the high
dividend-growers that win in the end, said Carin Pai, head of equity
strategy at Fiduciary Trust Company International. While valuations for
the highest dividend-payers appear stretched, valuations for
dividend-growers are lower than they have been in decades, especially
when compared to the broader market and their historical averages.
Dividend-growth stocks are trading at valuations that are at -1 standard
deviation from historical averages, whereas dividend-yielding stocks
traded at +1 standard deviation before recently correcting, according to
Pai. "We like the technology and healthcare sectors because you will
find a lot of companies with strong and sustainable cash flow growth and
even better balance sheets," said Pai, who is responsible for leading
Fiduciary Trust's equity strategy and process, as head of the Equity
Strategy Committee. She added that she is taking a cautious view of high
dividend-paying stocks which may not be covering their dividends with
cash flow and "may be susceptible to rising interest rates." Companies
that consistently grow their dividend payouts tend to generate strong
revenues, earnings and cash flow, according to Pai, so they are
generally resilient to a softening economy. Many also compete globally,
which may offset slowing growth at home with stronger returns from
foreign markets. Pai also calls dividend-growth stocks a solid hedge
against inflation. With an average increase of 5% to 6% annually,
dividend-growers have historically provided investors with an effective
hedge against inflation. "Dividend-growers gained 2% during the first
two months of this year, an especially rocky period for global equities.
The S&P was down 5.5% during the same period, so they are good for
mitigating volatility as well," said Pai.
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