One of the biggest contributors to market performance this year continues to be historically low interest rates. The result has been positioning across fixed income markets and equity sectors in an effort to benefit from the current environment. In the first half of 2016, the “bond proxy” sectors such as Telecom and Utilities dramatically outperformed the S&P 500 Index until the 10-year Treasury hit a low of 1.36% in July. Since the July 8th low, the subsequent rise in yields combined with Federal Reserve comments about a possible December rate hike propelled investors out of bond proxy sectors into more growth-oriented sectors such as Technology.
Historically “dividend growth” companies demonstrating earnings growth, strong free cash flow and rising dividends have been resilient in a rising interest rate scenario. Numerous studies point to the last eight Fed fund hikes where “dividend growers” experience strong performance compared to dividend non-payers, cutters and companies that don’t consistently increase their dividend. See chart below.
Dividend Performance After the Federal Reserve Increased Rates
(Subset of S&P 500 Index; All Rate Hikes Since 1972)
The U.S. bull market continues to forge ahead looking beyond the negative S&P 500 earnings projection for this quarter of -1.1% which would be the sixth negative quarter in a row. In the fourth quarter, we believe greater stability in the dollar and oil prices should help corporate earnings beat lowered expectations. This quarter we noted a slower pace of several shareholder friendly policies such as share buybacks and dividend growth rates. Despite the shift away from share buybacks, the Materials, Industrials, Financials, Technology and Energy sectors are projected* to accelerate their dividend growth along with stronger growth prospects with improving revenues.
As the search for yield continues into the end of the year, investors may be rewarded with S&P earnings finally turning positive and higher dividends in growth oriented sectors. Three of the four top gainers in the Dow Industrials over the past three months were Technology stocks with relatively high dividends – Apple, Intel and Microsoft – while the lowest returns were found in ExxonMobil, McDonalds and Walt Disney. For the quarter, the strongest sectors in the Navigator® High Dividend Equity portfolio were Technology +12.4%, Financials +4.0% and Industrials +3.6%, and the weakest were Utilities -6.8%, Telecom -6.6% and Staples -3.3%. Stocks purchased during the quarter included PPG Inc, Microchip Technology, Morgan Stanley, Kinder Morgan, IBM and sales were Kimberly Clark, Lyondell, Wyndham Worldwide, Public Storage and Disney.
Sources: Bloomberg, *FactSet, Ned Davis
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