Dividend stocks have had a rough year. Here's where the pros see opportunity

Published Sun, Nov 19 20238:28 AM EST

Investors like dividend stocks for their yields, but the equities' returns have been pretty dismal so far this year. Yet a group of investors believes there may be opportunity around the corner, as long as you know where to look. So far in 2023 there has been a stark divergence in the performance of dividend and non-dividend stocks. The 100 highest yielding names in the S & P 500 have an average total return of negative 7.94% since the beginning of the year through Nov. 10, according to Bespoke Investment Group. In comparison, the 100 stocks in the index that pay no dividend had an average gain of 8.94% through the same time period, the financial markets research firm found. That's no surprise given that yields in the bond market have reached levels not seen in decades, experts said. Bond yields move inversely to prices. "The issue is competition, because you can buy a three- to five-year investment grade corporate bond with a 5% yield," said Andrew Graham, managing partner of Jackson Square Capital in San Francisco. "That's what is putting pressure on these [dividend] stocks, or maybe just keeping them from lifting." Still, that pressure may be abating as investors anticipate that the Federal Reserve is close to finished with its rate hikes, said certified financial planner Dave Sheaff Gilreath, chief investment officer of Sheaff Brock Investment Advisors in Indianapolis. The central bank meets one more time this year in December. While officials have indicated a rate hike is possible, fed funds futures pricing data suggests a 100% probability that rates will stay unchanged at their current 5.25%-5.50%, according to the CME FedWatch Tool . "That speaks to the higher to longer" rate policy that Fed governors have referenced in their speeches, Gilreath said. "Once rates do plateau, then equities generally do really, really well." Specifically, value stocks — where dividend payers generally land — have historically outperformed during higher-for-longer periods, he noted. Under-the-radar plays Gilreath, who is also chief investment officer of Innovative Portfolios, thinks the most attractive part of the dividend market is smaller cap value stocks. A simple way to invest in the space is through exchange-traded funds, he added. IPDP YTD line Dividend Performers ETF (IPDP) performance year to date When it comes to specific stocks, Gilreath likes two under-the-radar plays: Brady Corporation and ABM Industries . Both are part of his firm's Dividend Performers ETF (IPDP) , which holds companies that have raised their dividends every year for at least a decade. The firm then sorts the stocks by forward risk, choosing the 50 lowest risk names. The fund has an expense ratio of 1.22%, but has a total return of 21.8% in 2023, according to Morningstar. Brady, which manufacturers identification and health-care products, has a 1.7% dividend yield. ABM Industries, which yields 2.1%, provides janitorial, facilities engineering and parking services for commercial real estate properties, entertainment venues and health-care facilities. "They really got hurt during the pandemic because no one was going into buildings. Now they have come out of that," Gilreath said. Finding income during a downturn While Jackson Square Capital's Graham is expecting lower yields in 2024, which are generally positive for income-generating equity portfolios, he is very specific about what he's adding and why. That's because he expects an economic slowdown or recession next year. "It has to have a strong fundamental story," he said. In this scenario, chemical makers are likely to become even more attractive, he said. At the top of his list is Dow Inc. , thanks to its strong balance sheet and the cost advantage it has over international competitors, when it comes to cos