With investors increasingly worried about sluggish economic growth, the end of the Federal Reserve's bond-buying program and debt woes in Greece, dividend stocks are suddenly looking a lot sexier.
Such stocks -- long the preserve of investors attracted by their steady stream of income and low volatility -- are luring new followers.
During the past three months, the WisdomTree LargeCap Dividend (DLN) exchange-traded fund, which consists of the 300 largest dividend-paying stocks as weighted by the dollar amount of their payouts, has returned 0.7%. That trumps the 1.86% loss of the SPDR S&P 500 (SPY, news) ETF, which tracks the broader-market Standard & Poor's 500 Index ($INX).
The rally in dividend stocks is part of a broader move by investors out of growth stocks and into more-conservative sectors such as utilities and consumer staples.
Earnings growth is beginning to slow as the bull market enters its third year, leading to a natural shift to stocks with more-predictable returns, including ones that pay dividends.
Recent U.S. economic data have been subpar, with payrolls expanding by just 54,000 in May, well below economists' estimates, and the Federal Reserve is reporting disappointing regional manufacturing activity.
"Dividend strategies do well when growth rates are slowing and equity returns are tapering off," says Savita Subramanian, the head of quantitative strategy at Bank of America Merrill Lynch. "We could see the market continue to reward dividend stocks."
Overall, dividend-paying companies in the S&P 500 increased their payouts during the past four quarters by 9% from a year earlier, to $213 billion. Some have announced steeper increases -- and have been rewarded by investors.
Farm-equipment manufacturer Deere (DE, news) rose 1.5% on May 24, a day the S&P 500 lost 0.8%, after the company announced it was raising its dividend by 17%. On June 9, shares of Vail Resorts (MTN, news) jumped 4.9%, versus the S&P 500's 0.6%, after initiating a dividend and releasing earnings.
With companies booking handsome profits and sitting on record amounts of cash, there is plenty of room for further increases: The amount of dividends paid out is well below its peak of $252 billion reached during the 12 months ended Sept. 30, 2008.
"Management has plenty of scope to boost their dividends," says Matt Peron, the head of active equity at Northern Trust in Chicago.
