Dividend strategies have not had it easy in recent years.

Highly valued stock markets caused dividend yields to fall and when the corona pandemic struck, dividends were even cut and typical dividend stocks did not do well at first.

In 2020, almost every third company whose stock is included in the MSCI World Index cut its payout.

This was the highest percentage of dividend cuts since the global financial crisis.

Martin Hock

Editor in business.

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As a result, dividend stocks fared considerably worse: while non-dividend payers in the American S&P 500 index achieved an average performance of almost 40 percent, dividend stocks were only less than 15 percent, according to data from the fund company T. Rowe Price. Accordingly, the NASDAQ US Broad Dividend Achievers Index, as the index of stocks with the greatest dividend growth, lagged significantly behind the market-wide S&P 500 index with a performance of around 7 compared to more than 16 percent. Overall, 2020 has been the worst year for dividend payers versus non-dividend payers and for dividend growth stocks since 2009.

With the market rotation towards value stocks in the wake of the pandemic optimism at the beginning of the year, dividend stocks caught up in the first quarter of 2021, but not stocks with high dividend growth that could not benefit from the market trend.

The heavyweights of the index include Microsoft, but also Johnson & Johnson and United Health.

These three Corona winners from 2020 alone make up more than 10 percent of the index.

Yoichiro Kai, portfolio manager of T. Rowe Price's global dividend strategy fund, has a few arguments ready as to why dividend stocks are a good idea right now.

Of course, he continues to rely on a strong recovery in the global economy and with it corporate profits.

The huge American investment packages would also help.

In the consumer discretionary, transportation, infrastructure and entertainment sectors, there are many companies with strong balance sheets and good management that have the potential for a strong recovery in dividend yields as well. Some of those returns are still 1 percent today but could climb to 3 or 4 percent in the next two to three years. However, the shares of companies that have cut their dividends because they were in trouble before the pandemic should be avoided.

Due to the possible long-term global rise in interest rates, Kai recommends adjusting the dividend strategy.

Basically there are 2 types of dividend payers: On the one hand, there are continuous payers, who are also seen as “bond replacements” such as utilities, real estate REITs, infrastructure or telecommunications companies.

If the yields on US government bonds rise faster than currently expected, these stocks are particularly vulnerable.  

Good balance required

On the other hand, there are also cyclical dividend payers such as banks, insurance companies, chemical, raw material or real estate stocks.

These usually performed better than average during economic upswings, even when bond yields rose.

Going forward, it is important to find a good balance between these two types of dividend stocks over the rate hike cycle. Hold more traditional dividend payers as the business cycle slows and more cyclical stocks during the recovery. T. Rowe Price tries to solve this with a portfolio in which the interest rate sensitivity varies with a constant average dividend yield. After a difficult 2020, this is expected to result in a good risk-return profile across market cycles.