Four trends in the dividend landscape

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According to the Capital Group, particularly in the financial, energy and healthcare sectors, investors can look forward to healthy dividend growth this year.

Rising bond yields and rising inflation don’t have to be bad for dividend stocks at all. Capital Group summarized in the publication Rotation of dividends in an inflationary world Four trends in the world of dividend distribution that investors can benefit from.

Positive correlation between dividend yield and bond yield

For most of the past 30 years, there has been a negative relationship between dividend yield and US Treasury yields. In the past two years, that relationship has upended. High-yield stocks now have a positive correlation with bond yields. If this trend continues, higher interest rates will dampen expectations for dividend stocks lower than before.

However, it is important to watch out for companies that are overburdened with debt or have excessive relative debt on their balance sheets as interest rates rise.

Dividends are rising, but at a slow pace

Many companies are taking a more thoughtful approach after experiencing them during the low phase of the pandemic, when they had to slash or even drastically cut their profits. With global economic growth slowing, some companies prefer to hold cash in case the slowdown continues for longer than expected. Some sectors, such as the travel sector, still face a high degree of uncertainty.

However, out of 242 companies that suspended or reduced their dividends in 2020, 98 resumed their payments and only three cut their dividends in 2021. Companies with pricing power are likely to be in a better position to increase their dividends.

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Highly cyclical companies choose variable dividends

In cyclical sectors particularly, some companies innovate by balancing their business needs with a commitment to paying dividends. Take, for example, the mining sector, which experienced a boom in dividend payments in 2021. In recent years, many large mining companies, such as Rio Tinto and Vale, have moved from a gradual dividend policy to a payout ratio. This allows these types of companies to sustainably manage their balance sheets and cash flows over multiple commodity cycles.

Opportunities in the financial, energy and healthcare sectors

Finance, energy, and healthcare are a huge part of the dividend payout world, and in each of these sectors, a combination of factors appears to support the dividend increase.

financial companies
Higher interest rates should help the more rate-sensitive banks in the US and Europe to expand their profit margins, which have been under pressure for years due to persistently low interest rates. This can result in stronger earnings, better dividend flows, and higher valuation multiples.

energy
The oil majors have always been good sources of stable dividends for income-oriented investors. These energy companies are also becoming more disciplined in their energy supply, limiting their investments in existing reserves and looking for new oil wells.

Healthcare
Healthcare companies can be a source of earnings growth and earnings growth in the current inflationary environment. Historically, pharmaceutical companies have had relatively strong pricing power. While the industry has faced political pressure on drug prices, the most innovative drug companies are likely to be able to raise prices at modest levels.

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The IEXProfs Editors It consists of several journalists. The information in this article is not intended to be professional investment advice, or as a recommendation to make certain investments. Editors may hold positions in one or more of the listed funds. Click here for an overview of their investments.

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