3 Reasons High Dividend-Paying Stocks Can Rebound

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Rising interest rates have been a headwind for high-yielding dividend stocks.

If asked to choose between buying the world a Coke and Coke’s stock, it seems plenty of investors would shun the latter option.

The problem is even greater for high-dividend-paying stocks. Yield-hungry investors now have alternatives that simply weren’t available in the previous era of ultralow interest rates, such as bonds and high-yield savings accounts. In addition, sectors known for their high payouts have faced other challenges. Consumer staples stocks have been hit by worries about weight-loss drugs, for example, while energy stocks have struggled with largely rangebound oil prices this year.

For starters, history would suggest that their underperformance can’t last long. Over the past three decades, “there have been only two periods where high dividend yielding stocks have performed worse relative to the S&P 500 on a year-over-year basis: the tech bubble and the pandemic,” Belski writes. “According to our work, this type of abnormal underperformance has typically proved to be an inflection point historically.

Secondly, investors have “unfairly punished” high-yield stocks solely because they expect interest rates to be higher for longer, Belski says. While relative performance has tended to improve with falling interest rates, over the long term, rates haven’t been the biggest determinant for these dividend payers’ stocks. That lack of correlation between rates and their rise and fall means the current narrative likely won’t remain the determining factor for the group in the long run.

 

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