After two years of outsized gains for the S&P 500® Index, 2022 could be a year of modest return expectations. However, Q1 2022 proved to be more challenging than anticipated, as investors grappled with inflation nearing a 40-year high, rising interest rates and elevated geopolitical risk. For long-term investors, we believe the recent sell-off could provide an attractive buying opportunity. In our opinion, investors should look to increase their allocation to dividend paying equities, particularly those with growing dividends.
Here’s why we believe that 2022 could be the year of the dividend:
What are dividends?
Dividends are a cash return on investment that a company pays out to its shareholders. They are typically declared by a corporation’s board of directors and are generally distributed to shareholders as a portion of a firm’s earnings or free cash flow. These distributions allow shareholders to participate in a company’s growth and are also a good indicator of the company’s value, quality and future growth.
Corporations can pay dividends in cash, additional shares or other property, such as shares in a spin-off of a subsidiary.
Why the time may be right for dividends
Should volatility persist and investors need to supplement full-year returns, we believe dividend-paying companies could act as a potential inflation hedge, an attractive equity-income opportunity and a defensive equity strategy.
Attractive equity-income opportunity
Both historical and shorter-term data support the case for dividends as attractive equity-income opportunities:
- Approximately 40% of S&P 500 Index returns have come from dividend income over the past 90 years, according to data from Columbia Threadneedle.1
- The median dividend increase for S&P 500 companies was 8.3% in 2021, according to S&P Dow Jones Indices (SPDJI).2
- 78% (or 395 issues) of the S&P 500 paid a dividend at the end of February.2
Source: Columbia Threadneedle Investments and American Enterprise Investment Services, Inc.
This graph is shown for illustrative purposes only and is not guaranteed. Past performance is not a guarantee of future results.
Potential inflation hedge
Even though we expect it to ease as the year progresses, “sticker shock” memories could persist. Adding dividend growth equities to portfolios could help investors combat inflation’s lingering impacts on potential returns.
Defensive equity strategy
The surge in commodity prices and the intensifying supply chain disruptions experienced in Q1 2022 could create headwinds for corporate earnings growth in 2022. Although the earnings outlook could be less robust, we believe the outlook for dividend growth remains favorable.
In Q4 2021, the dividend payout ratio was at a decade low even though dividends paid hit a new record based on SPDJI’s data.2 The dividend payout ratio is the percentage of earnings returned to shareholders through dividend payments.
In our opinion, this “pent up” earnings per share retention could bolster dividend growth in 2022. FactSet consensus estimates indicate dividends per share (DPS) for the S&P 500 could rise 8.0% y/y, up from the early January 2022 forecast of 7.0% growth.3 Analysts forecast DPS growth for the Information Technology and Financials sectors, which pulled back in Q1 2022, to outpace the broader S&P 500 this year.
Are dividend-paying stocks right for your portfolio?
If you’re interested in incorporating dividend-paying equities into your portfolio, reach out to your Ameriprise financial advisor. They’ll be able to provide a personalized recommendation that accounts for your financial goals, risk tolerance and time horizon.