Viewpoint on dividend stocks

May 24, 2017
By BlackRock

Investors seeking income and growth have found favor with dividend stocks. But not all dividend payers are created equal. BlackRock’s Tony DeSpirito weighs in on where you might focus your attention.

What differentiates one dividend stock from another?

There are clear distinctions that set dividend-growth stocks apart from other dividend payers, and particularly from the highest yielders. Chief among them right now is valuations.

High yielders have gotten expensive as investors stretched for income after years of low bond yields. Dividend growers were more or less ignored as a consequence, and that leaves them with more attractive valuations. This means higher-quality stocks at more attractive prices.

You mentioned higher quality

Indeed. Companies with the ability to consistently grow dividend payments tend to be strong franchises. A healthy balance sheet and ample free cash flow provide the means to grow the dividend. Conversely, we would view an unhealthy balance sheet or a payout ratio that’s too high (unsustainably so) as red flags.

Are dividend growers also less volatile?

That has been my experience. Statistically, a company’s commitment to paying a dividend has tended to provide resiliency in down markets. No corporate executive wants to cut a dividend, so these tend to be well-run companies built to weather diverse markets.

How might dividend stocks fare amid reflation and rising rates?

Here again dividend growers have an advantage. The highest-yielding stocks are essentially “bond proxies.” As such, they might be expected to follow the bond market down when rates rise. Quality companies consistently growing their dividends have historically held up better when yields rise. And that means their stocks have tended to outperform in a rising-rate environment.


Tony DeSpirito
Director of Investments, U.S. Equities
Antonio (Tony) DeSpirito, Managing Director, is Co-lead of the Equity Dividend Team and Director of Investments, US Equities...