Large-cap tech’s outperformance is overshadowing dividend-paying stocks in the first half of the year, but those income-oriented names could find themselves in favor during the second half, according to Ned Davis Research. Dividend payers are on track for their worst half against stocks that don’t pay dividends since 2009, Ed Clissold, the firm’s chief U.S. strategist, wrote in a June 22 report. “Our index of S & P 500 Dividend Payers underperformed Non-Payers by 13.7% year to date,” he said. “If the spread holds through the end of the month, it will be the worst first half for Payers versus Non-Payers since 2009 and the fourth worst since data began in 1973.” Consider that, while the S & P 500 is up 14% year to date and the Nasdaq Composite has rallied 30% — putting it on pace for its best first half in forty years – the SPDR Portfolio S & P 500 High Dividend ETF (SPYD) is down nearly 8%. Meanwhile, the ProShares S & P 500 Dividend Aristocrats ETF (NOBL) is up 3% in 2023. SPYD .SPX YTD line SPDR Portfolio S & P 500 High Dividend ETF versus the S & P 500 in 2023 One of the reasons behind dividend stocks’ underperformance is the fact that they have low betas. That is, their volatility is low relative to the overall market, which means they underperform cap-weighted indexes during rallies, Clissold said. However, a few tailwinds may be in store during the second half that could lead investors to embrace income-paying stocks. For starters, dividend payers tend to outperform during the second year of the Federal Reserve’s tightening cycles, NDR found. The central bank is more than a year into its rate-hiking cycle, and Fed Chairman Jerome Powell has indicated that more “restriction” is coming . “On the bullish side, gains by the broad market have tended to moderate during tightening cycles, benefiting low-beta stocks,” Clissold wrote. Meanwhile, higher interest rates create yield competition for stocks, he added. Another favorable development that’s on the horizon is the growing prospect of an economic downturn. NDR’s macro team anticipates recession risks will rise in early 2024. “Payers have tended to outperform Non-Payers heading into recessions, but the strongest gains have begun around two months before the start of recessions,” Clissold said. “Payers should benefit on a relative basis if the stock market begins to price in a recession,” he added, “but the most likely bullish period for Payers may not come for several months at least.” — CNBC’s Michael Bloom contributed reporting.
