Dividends4Life: As dividend-paying stocks fall out of favor, trading strategies could help

The problem with dividend-paying stocks isn't that their payouts are expected to decline. On the contrary, Reality Shares Research has found that through periods of rising interest rates from 1972 through 2014, dividend growth was positive in 40 out of 43 years. In fact, the only time dividends declined during a rising-rate environment was in 2009 during the aftermath of the financial crisis and resulting stock-market correction. Even though dividend payments have increased, investors in dividend-paying stocks have not fared well during periods of rising rates, suffering share price returns that substantially lag non-dividend paying stocks. In fact, in an analysis of market data from 1927 through 2013, Morningstar Inc. determined that stocks with the highest dividend yields had negative returns in periods of rising interest rates.

Actual dividend payments may have even increased over that time, but as investors rotated out of the stocks in favor of rising bond yields, the share-price declines overwhelmed the dividend yield. So there appears to be a sound basis for investors to withdraw from dividend-paying stocks in the current market, and the evidence suggests the exodus has already begun. The Wall Street Journal highlighted the trend in a May 31 article, U.S. Dividend Stocks Lose Luster, noting a reversal of the $48.4 billion of inflows into mutual funds and ETFs tracking utilities and REITs from 2010 through 2014. Citing Morningstar data, the Journal wrote that investors have pulled $3.5 billion from REITs and utilities funds so far this year, and the S&P Utilities index, MSCI US REIT index and Alerian MLP index have all posted negative returns for 2015 through May 28.

Source: Investment News

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