Companies that raise their dividends do more than offer higher income for investors — their stocks also outperform over the next six months, according to Morgan Stanley. Investors are seeking better-yielding dividend stocks as they navigate a higher interest rate environment. However, the market’s reaction to the dividend policy change is also important. In a review of relative price returns, excluding dividends, among Russell 1000 constituents, companies that increased their dividends saw their stocks rise an average of 3.9% in the six months following the announcement, the firm said. Morgan Stanley reviewed data between 2014 and 2022. On the other hand, companies that cut their dividends underperformed even more sharply, down 9.6% six months after an announcement. “Dividend increases lead to higher returns and cuts portend lower returns, on average,” wrote Todd Castagno, strategist at Morgan Stanley. Broken down even further, the data showed that larger dividend increases correlated with larger share price increases — with the reverse also being true. A company that announced a dividend increase larger than usual by 75% or more outperformed on average by 14.2% six months afterward, according to the note. Meanwhile, firms that issued smaller increases, up to 10%, outperformed by 1.7%, Castagno wrote. Meanwhile, companies that reported large dividend cuts, of 50% or more, saw their share price drop 16.8% on average. The firm found that sectors matter, as well. Investors reacted more positively to energy, information technology and materials firms that announced dividend raises. Given this, Morgan Stanley found some firms that recently raised their dividends by at least 10%. Here are some of those names. Analog Devices shares made the list. In February, the semiconductor manufacturing stock raised its dividend per share by 13%, according to the note. The stock is up about 15% this year, and it has a 1.8% dividend yield. In addition, Bank of America recently reiterated a buy rating on the chip stock , saying its “best-in-class” free cash flow returns and various growth opportunities position the stock for double-digit upside. Schlumberger shares could also outperform. In February, the oilfield services company doing business as SLB raised its dividend per share by more than 40%, according to Morgan Stanley. It has a 2% dividend yield, according to FactSet. Shares are down nearly 6% this year. This week, Goldman Sachs said investors should buy Schlumberger calls ahead of its latest earnings results this month, saying rising rig construction activity abroad will mean “strong growth, margin improvement” for the firm. Constellation Energy doubled its dividend yield in February to 1.5%. While its shares are down 11% this year, UBS said the nuclear stock is its top Inflation Reduction Act beneficiary pick for 2023 and beyond, according to a February note. Other stocks in this list include Dick’s Sporting Goods and Tractor Supply . — CNBC’s Michael Bloom contributed to this report.
