Dividend Growers Look More Favorable When Rates Rise | American Funds

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sustainable income  |  dividends  |  july 2015
Dividend Growers Look More Favorable When Rates Rise

Investors Have Been Paying Up for Yield at the Expense of Dividend Growth

“What we’ve seen from the likes of Microsoft, Texas Instruments, Analog Devices and Intel is capital discipline and a commitment to pay a dividend to shareholders. The realization that they can’t easily cut dividends really makes them better capital allocators within their own business.”

Hilda L. Applbaum Portfolio Manager 30 years of experience (as of 12/31/16)

Companies in Cyclical Industries Have Been Growing Their Dividends the Fastest

Charts show dividend yield and trailing 3-year dividend per-share growth for various S&P 500 sectors

Source: FactSet. As of March 31, 2015.

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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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.