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Dividend payers are crushing big buybackers

In the battle between the barons of buybacks and the divas of dividends, the divas are getting out to an early lead.

The PowerShares Buyback Achievers ETF (PKW), which tracks U.S. companies that have repurchased 5 percent or more of their outstanding shares over the past 12 months, is flat this year, underperforming the S&P 500. Meanwhile, the iShares Select Dividend ETF (DVY), which follows stocks with consistently high dividend yields, has risen 9 percent in 2016.

The trend probably comes down to two big catalysts: falling risk appetites and dropping interest rates.

First of all, investors appear to be shying away from risk, a shift that can also be gleaned from the relative performance of a host of different assets. For instance, gold has been handily beating stocks this year, and consumer staples companies are far outperforming their discretionary brethren.

This sentiment environment should tend to be good for dividend stocks relative to buyback names, as dividend payers are often considered to be more stable and steadfast companies. Topping the list of holdings in the DVY ETF are companies like Lockheed Martin, Chevron and Kimberly Clark.

Second, dovish signals from the Federal Reserve and economic worries have led bond yields to slide powerfully. The 10-year Treasury note yield started the year at about 2.3 percent, and is now below 1.8 percent. This decline naturally leads yield-seeking investors to favor high-dividend payers, as compared to buyback titans.

As the Fed pushes rate hikes further and further into the future, "dividend stocks are going to be the name of the game," RJO Futures strategist Phillip Streible predicted Friday on CNBC's "Trading Nation."

For her part, Erin Gibbs of S&P Investment Advisory pointed out that the outperformance of high-dividend stocks shouldn't really be a big surprise.

A look at the past 15 years of relative returns tells her that "about two-thirds of the time, you're better off buying high-dividend stocks than high buybacks," she said in the same "Trading Nation" segment.

Those buybackers tend to outperform in low-volatility times, but "as we expect this year to be marked by high volatility, we might see a continued trend of the DVY beating the PKW," Gibbs wrote to CNBC.

Such outperformance could then come back to impact corporate decision-making.

As buyback-heavy stocks underperform, "we think companies will shift to cash return via dividends," BofA Merrill Lynch's Savita Subramanian predicted in a recent note to clients.

She adds that dividends are primed to rise particularly since the "dividend payout ratio is still near the low end of its historical range," and the aging of the developed worth means that "the demand for yield will only grow."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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