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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