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April 2022

Equity Income: Checking in on Dividend Stocks after a Volatile 1Q

Despite some mean reversion, valuation gaps and yield spreads remain ongoing tailwinds relative to the broader market


Generate income from companies with resilient, growing free cash flow


Remain positioned for economic growth, inflation and interest rates, all elevated but moderating

Amidst a volatile market, here’s an early assessment of dividend stock performance so far this year relative to our outlook.

How did we envision the year playing out and where do we stand three months in? Our 2022 outlook discussed expectations for higher volatility, and we’ve certainly seen that.

We expected robust economic growth to continue, but moderate. It remains above trend, which we see continuing but with further moderation. A contributing factor is inflation, which looks to be elevated for longer, partially driven by the Russia-Ukraine conflict. Interest rates have risen, with the start of Fed increases making that true across the yield curve.

We have seen our portfolio companies continuing to execute well amidst the challenging environment. Dividend growth has exceeded expectations, moving toward the upper end of our long-term range of mid-single digits.


Dividend stocks have held up well. Our benchmark, the Dow Jones U.S. Select Dividend Index, ended 1Q22 up 5.4%, materially outperforming the broader market. Why? A few factors.

First, yield spreads relative to the broader market remained very elevated as 2022 began, and we have seen some mean reversion*. Second, rising rates have impacted valuations for long-duration equities, where future earnings and returns are a more substantial portion of overall value. These are growth companies. Dividend stocks pay out from free cash flow in the nearer-term, and are less impacted. S&P Value, with characteristics similar to dividend stocks, has outperformed growth by 8% year to date (YTD). We have seen some further mean reversion of high-multiple stock valuations, closing a little of the gap highlighted in the nearby chart. Third, the three sectors most materially overweight in the dividend index are utilities, financials and energy. Inflation and rising interest rates benefit the latter two, while volatility and geopolitical turmoil have benefited the first. These sectors are among the top performers year to date.

With the forward outlook similar to where it began the year and despite some mean reversion, valuation gaps and yield spreads for dividend stocks remain elevated, and we continue to like the outlook for generating income from companies with resilient, growing free cash flow.

*Mean Reversion: or reversion to the mean, is a theory used in finance that suggests that asset price volatility and historical returns eventually will revert to the long-run mean or average level of the entire dataset.

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