by Thomas Forsha, CFA

Is now the time to be adding dividend-paying stocks to your portfolio? With interest rates moving higher, and deflationary pressures subsiding, the key drivers of growth outperformance over the past decade appear to be stalling.

What seems to be a longer-term shift may support value and higher quality dividend-paying companies versus speculative growth companies.

The promise of a dividend check provides an additional dose of certainty for investors. According to Ned Davis Research, dividend-paying stocks in the S&P 500® tend to underperform non-payers in the months leading up to the first-rate increase of a tightening cycle, but in the years after the initial increase dividend payers have outperformed on average by a wide margin. While the past decade has been tough for dividend-focused investors, the best performance for dividend payers has historically been the period that followed the first fed funds rate increase. 

Source: Ned Davis Research, Inc. See NDR Disclaimer at www.ndr/copyright.html.

For vendor disclaimers refer to www. ndr.com/vendorinfo/

With interest rates marching higher and the yield curve steepening, Ned Davis Research points toward the potential for the outperformance of value stocks during a rising rate environment. Will the yield curve steepen over the second half of the year as the Federal Reserve is able to successfully manage a soft landing for the economy, or will tightening prompt a recession causing the yield curve to collapse again? Either outcome is likely to prove favorable for the relative performance of value strategies. And historically, the average value stock tends to enjoy higher dividend income than the average growth stock.  

Past performance is not a guarantee of future results.

Diversification does not guarantee a profit or protect against a loss in declining markets.

Investing involves risk including possible loss of principal. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market.

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This does not constitute investment advice or an investment recommendation.

This represents the views and opinions of River Road Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader theme.

Data is from what we believe to be reliable sources, but it cannot be guaranteed. River Road Asset Management assumes no responsibility for the accuracy of the data provided by outside sources.

In a recent Business Insider article, Charles Schwab is warning that stocks could see more volatility through the rest of this year, as we head into what the firm considers a weak earnings season. The company believes that more companies could miss earnings estimates in the following quarter, using FedEx as an example. The transportation firm slashed its earnings guidance last week in what is expected to be a sign of things to come for the rest of the S&P 500. In a note on Monday, analysts stated, "We believe the weakness in expected earnings growth is early in its trip to an ultimate negative (year-over-year decline) destination." Analysts also noted that the rate at which S&P 500 companies beat earnings expectations fell to 5% last quarter. This compares to over 20% in the middle of 2021. The company noted that the trend could be even lower in the third quarter as earnings reports come in. Excluding the energy sector, Schwab estimates that earnings growth in the S&P 500 will shrink by 2% over the third quarter, down over 11% from June.

Finsum:Analysts atCharles Schwab are warning of more stock volatility as we head into a weak earnings season.

The Carson Group recently announced several new developments during a Partner Summit, including a new model portfolio hub. The company, which was founded in 1983, is made up of three related businesses including a wealth management firm, a coaching network, and a partnership established in 2012 with approximately 120 affiliated firms. The firm’s announcements included updates and additions to its rapidly growing platform, including a lead generation program, a new investment research portal, additional alternative investment options, and a “model hub” to let advisors administer multiple accounts simultaneously. Burt White, Chief Strategy Office of Carson said this of the new model portfolio hub, “What it allows you to do is to create a model and tie multiple clients to that model. One, two, 15, or a hundred. And then every time you change the model, it goes through and does it for all 100 of those clients that are tied to the model, as opposed to today, where you have to go into every single one.” The model portfolio hub is expected to launch early next year.

Finsum:Carson Group announced several new additions to its platform, including a model portfolio hub that lets advisors administer multiple accounts simultaneously.

The Department of Labor has asked a Texas federal judge to toss a fiduciary rule lawsuit brought by a group of licensed independent insurance agents and the trade group Federation of Americans for Consumer Choice Inc. The agents and the trade group had sued the agency in February arguing that a December 2020 DOL regulation advances policies that the Fifth Circuit invalidated in 2016. Their complaint alleges that the 2020 rule illegally expands the definition of an Employee Retirement Income Security Act fiduciary. The plaintiffs moved for summary judgment in July asking the court to vacate the new interpretation of the law. They reasoned that the rule allows the DOL to "rewrite and expand" the definition of a fiduciary, much in the same way that the Fifth Circuit had ruled against it. The DOL, in a recent memorandum, said the plaintiffs adopted "several extreme positions" to conflate a 2016 agency rule with a newer version from 2020 and that they distorted Fifth Circuit precedent.

Finsum:The DOL asked a federal judge in Texas to toss a fiduciary rule lawsuit against the agency that claims its 2020 regulation advances the same policies that the Fifth Circuit invalidated in 2016.

According to an analysis by ESG specialist Elisabeth Steyn, U.S. equity funds that are classified as ESG, have on average 29% of their holdings in tech stocks. Steyn told Alice Ross of Financial Times that the figure is well above the 23% average for general equity funds. Ross used the iShares ESG Aware MSCI USA ETF as an example. The fund’s top holdings include Apple, Microsoft, Amazon, Tesla, and Alphabet. This may help explain why many ESG funds are seeing heavy losses this year. Ross attributed the reason to two factors. First, ESG funds are exclusionary. Once certain areas of the market are stripped out, tech is typically over -represented. The second reason is that ESG rating agencies can differ greatly on which companies are sustainable. That reason alone can help explain why the SEC is going after ESG labeling. Ross also noted that ESG funds outside the U.S. are not typically overweight in tech stocks.

Finsum:U.S. ESG funds are heavily overweight in tech stocks due to differing ESG labels and exclusionary factors.