Companies in Cyclical Industries Have Been Growing Their Dividends the Fastest
With interest rates near record lows, yield-starved investors have turned their attention to equities. In the U.S., higher dividend yielding companies, which typically trade at a significant discount to their dividend growing counterparts, have traded at a premium over the last four years. The prospect of a Fed rate hike later could make the environment more challenging for income-oriented investors that have favored the highest yielding, more rate-sensitive sectors, such as utilities and telecommunications.
But not all areas of the equity income market are similarly susceptible to rising rates. Higher yielding companies in economically cyclical industries, such as those in the consumer discretionary sector, look favorable. Because they have the potential to benefit from growth, such stocks may be less impacted by rate increases tied to an improving economy. In a rising-rate environment, a focus on lower yielding companies with the potential to grow their dividends over time may prove beneficial.
Dividend growth has been strong in some unexpected areas. In the industrials sector, the airlines have been generating record profits and instead of buying new planes, these companies have been returning cash to shareholders. Similarly, technology companies, such as Cisco and Microsoft, have demonstrated a commitment to growing their dividends at a similar pace as — and in some cases faster
than — earnings.
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