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What Fed hikes mean for dividend stocks
Are stocks that pay dividends in trouble now that the Federal Reserve is serious about raising interest rates back to more normal levels? (The Fed hiked rates Wednesday for the third time since December and said another hike is likely this year with three next year.)
The answer depends on what kind of stocks you own, according to an analysis by Santa Barbara Asset Management that looked at how dividend-paying stocks have done the past eight times since 1972 the Fed has been in ratehike mode. The analysis found that stocks in the S&P 500 stock index that not only pay out a cash dividend, but which also increase the payout regularly, do best, posting average 36-month returns of 14% in those past tightening cycles. The next best performer? Dividend payers that didn’t boost payouts, with an average gain of 8%. Companies that pay dividends but cut them fared the worst, posting an average loss of 2%. Non-payers rose 1%.
So what explains “dividend growers” better performance? When the Fed is pushing rates higher it normally means the economy is doing better, which benefits well-run companies that can boost sales and earnings. That frees up cash to increase dividends and give more profit back to investors, says Hai Vu, director of research at Santa Barbara Asset Management.
In recent years, old tech companies such as Microsoft, as well as tech titans such as Apple, have emerged as dividend growers.