Dividend Darlings Trail Stock Market Despite Pumped-Up Yields

Some big-name stocks are sporting chunky dividend yields. Many yield-starved investors are still saying no thanks.

Companies in the S&P 500 with at least a quarter-century record of paying out and increasing dividends -- dubbed " dividend aristocrats" by Wall Street -- have trailed the broader stock market this year. That is even as record-low interest rates have resulted in a scarcity of yield across the world.

The S&P 500 Dividend Aristocrats Index, which measures the performance of 65 companies, has fallen 0.7% this year, while the broader S&P 500 has risen 7.3%. That puts the benchmark index on pace to outperform the dividend aristocrats index by the widest margin since 2007.

Meanwhile, some of the most iconic dividend aristocrats have fared even worse.

Exxon Mobil Corp., whose dividend yield is sitting at a near-record of more than 10%, has tumbled 51% in 2020, burned by a collapse in oil prices. AT&T Inc., with a dividend yield of more than 7%, has fallen 29% as the coronavirus pandemic has weighed on the company's foray into show business. And Walgreens Boots Alliance Inc., offering a nearly 5% dividend yield, has plummeted 35% as fewer customers have trafficked its stores due to Covid-19.

The slide in stock prices shows the extent to which many investors are worried about the prospects for dividend aristocrats. The index recently offered a dividend yield of about 2.7% -- humble in nominal terms, but still greater than the S&P 500's dividend yield of about 1.7% and more than triple the yield of the 10-year U.S. Treasury note.

Even so, that hasn't been enough to persuade investors who have yanked more than $40 billion from global dividend- focused mutual and exchange-traded funds in 2020 through Wednesday, according to data from EPFR. That surpasses the more than $3 billion that was pulled during the same approximate period in 2019. With the new coronavirus having upturned the economy, many investors have instead sought returns from highflying tech stocks amid worries that many of the long- established dividend payers aren't guaranteed to deliver in the coming year.

"You had more volatility in the dividend space than you normally do and I think that turned a lot of investors off," said Richard Sherry, a portfolio manager at Kayne Anderson Rudnick.

Only one company, Ross Stores Inc., has been removed from the dividend aristocrats index this year after suspending its dividend payout, according to S&P Dow Jones Indices.

Still, a number of investors believe that, even among the dividend aristocrats, there could be cuts on the horizon.

Mr. Sherry, who manages several funds that invest in value stocks and companies with robust dividend yields, sold Exxon shares earlier this year when he noticed the company's cash flow getting worse and as the oil-price fight between Saudi Arabia and Russia intensified. Exxon has had to take on debt to cover its hefty payouts, raising questions about the sustainability of its dividend strategy.

An Exxon spokesman said in an email that the company had a long history of providing investors a reliable and growing dividend. "A large portion of our shareholder base has come to view that dividend as a source of stability in their income, and we take that very seriously," he added.

Some investors say traders already are placing bets on a potential dividend cut. Activity in the options market implies Exxon's dividend will fall by more than half by this time next year, said Michael Khouw, chief investment officer of Optimize Advisors.

"With companies that have abnormally high dividends, something is usually going to give, and more often than not it's the dividend," Mr. Khouw said.

He added that Exxon rival Chevron Corp. also looks vulnerable given its debt load and the sweeping challenges the energy industry faces at the moment. Chevron didn't immediately respond to a request for comment.

Other companies within the energy industry, including Royal Dutch Shell PLC and BP PLC, have cut their dividends this year. Neither company is in the dividend aristocrats index.

A dividend cut or suspension could ramp up selling pressure on Exxon, said Bill McMahon, chief investment officer of active equity strategies for Charles Schwab Investment Management.

"The thing that [Exxon] needs to weigh is that the people who are invested in that stock are really there for the dividend," Mr. McMahon said.

Some analysts are advising yield-seeking clients to focus more on companies with stable balance sheets and a trend of dividend increases, rather than the firms with the biggest overall dividend yields. Bank stocks, for instance, have historically offered investors relatively good yields. But the Federal Reserve has warned that banks could face as much as $700 billion in loan losses if the economic recovery takes longer than expected, making the group a potentially risky play.

"The economic recovery is likely to be too slow to just dive in" to even deeply discounted shares because of their dividend yields, said Simeon Hyman, global investment strategist at ProShares.

Several dividend aristocrats have managed to outperform not just the group but also the S&P 500 this year. Target Corp., which has a dividend yield of 1.7%, is up 25% in the year to date. Lowe's Cos., which has a dividend yield of nearly 1.4%, has risen 44%. Stocks trading at higher prices typically offer lower dividend yields, while those trading at lower prices tend to have higher dividend yields.

Because bond yields have fallen so much in the past few years, many companies already offer dividend yields that exceed those of ultrasafe government bonds. At the close of trading Friday, about 70% of S&P 500 companies had dividend yields above the 10-year Treasury yield, compared with nearly 48% at the end of last year, according to Dow Jones Market Data. The yield on the 10-year Treasury settled Friday at 0.840%.

Investors like Mr. Sherry believe that despite not faring well this year, many dividend stocks will likely enjoy a resurgence in popularity at some point. Clients he has spoken to have indicated they still want a source of relatively stable income, especially given how volatile the broader market has been this year.

"Given the low interest rates, investors will recognize a need to look at dividend-paying stocks," he said, noting that many will specifically be looking for "stocks that have come out the other side of Covid-19 with strong balance sheets and cash flow. And that's when these stocks will do better in the marketplace."

Write to Akane Otani at akane.otani@wsj.com and Caitlin McCabe at caitlin.mccabe@wsj.com


  (END) Dow Jones Newswires
  10-25-20 0544ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

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