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Market Reversal Boosts Big Dividend Stocks

Cash is king right now. The latest evidence: The market is embracing another longtime favorite, dividend-paying stocks rather than repurchase firms.

Investors rush to companies that promise regular payments According to shareholders, it’s a sign of cash-hungry on the hands of Wall Street as the Federal Reserve raises interest rates and major stock indexes struggle.

The S&P 500 fell 0.8% on Tuesday, while the Nasdaq Composite Index fell 2.3%. tech stocks down concentrated. comes later Major indices rally on MondayThe dips were another example of whip trading confounding investors in recent months.

There are investors turning to companies like this.

AT&T Inc..

and cigarette maker

Altria Group Inc..

while driving the wider market one of the most volatile extensions of the last ten years. Concerns about rising interest rates, sky-high inflation, and slowing growth have swamped the stock market, prompting many investors to abandon the high-flying companies that have dominated the past decade, often either no dividends or just a small company.

It’s incredibly popular to hold cash on Wall Street today. This is a huge sea change from the way professional asset managers have behaved over the past decade. WSJ’s Dion Rabouin explains why cash is no longer garbage. Example: Adele Morgan

Company executives who choose to buy back shares and pay dividends have often been rewarded by shareholders in the 20 years leading up to the Covid-19 pandemic. There has been a breakup recently.

Since the beginning of 2020, companies that pay high dividends continue to outperform those that pay lower, while company stocks investing the most money in stock buybacks It lagged behind those with the lowest buybacks, according to Credit Suisse analysts.

“If I have a choice between buying more of your stock or giving me cash… I’d rather take cash,” said Max Wasserman, founder of Miramar Capital, which manages shares of dividend-paying companies.

United Parcel Service Inc..

This year, it has increased its return to investors.

The change shows the premium that investors pay for fixed cash payments rather than the promise of future profits. This preference was further intensified as the Fed launched an ambitious campaign to raise interest rates to rein in inflation. High inflation and rising interest rates eat the value of companies’ future earnings while increasing the attractiveness of cash today.

The Pacer US Cash Cows 100 ETF, an exchange-traded fund aimed at investing in companies with a large number of free cash flows, has risen nearly 1% this year while major indexes are down in the double digits.

Most of the stocks with the highest dividend yields in the S&P 500 are surpassing the broader market. Shares of AT&T are up 14% this year, shares of Altria Group are up 12%, and shares of the pipeline operator are up.

Oneok Inc..

It added 8.5%. According to FactSet, the dividend yield of all three stocks is over 5%. The indicator index fell 17% in 2022 and swinging on the edge of the bear market zone.

Companies in the S&P 500 paid a record $137.6 billion dividend in the first quarter, according to the S&P Dow Jones Indices, and senior index analyst Howard Silverblatt expects a new record to be set in the current quarter.

The S&P 500 High Dividend index rose 3.6% in 2022, while the S&P 500 Repurchase index fell 13%.

Dividend stocks haven’t always been star players. In recent years, many investors have piled into high valuation companies, and many of them offer big payouts in the future rather than now. This year, most of these bets made a U-turn and weighed in on the wider market. Investors said the free cash offered by dividend-paying companies is now more valuable to them because of higher interest rates.

John Augustine, Huntington Private Bank’s chief investment officer, said his company’s equity strategies have added dividend-paying stocks in recent months, and each has a higher dividend yield than its benchmark.

“We don’t know what the Fed will do next year, so I want the money now,” Mr. Augustine said.

The craving for cash today is evident in the widening gap in performance between the highest dividend yielding big-cap US stocks and non-dividend-paying stocks.

SHARE YOUR THOUGHTS

Do you expect dividend-paying stocks to continue to outperform? Why or why not? Join the chat below.

Shares in the Russell 1000, which had the highest dividend yield on November 19, 2021, rose an average of 4% in the following six months, according to Bespoke Investment Group. Shares of the non-dividend Russell 1000 companies fell an average of 29% over that time.

Giorgio Caputo, fund manager of the JOHCM Global Income Generator Fund, said he has recently preferred energy companies because of the higher dividend expectation. Additionally, he made adjustments to his portfolio due to high inflation and rising interest rates.

“It’s almost a 180-degree change from what we’ve seen in the last decade,” he said.

Write to Karen Langley at karen.langley@wsj.com and to Gunjan Banerji at gunjan.banerji@wsj.com.

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