December 7, 2020 BARRON’S 17
continue?
“Dividend yield as a strategy won’t
work unless value as a broader strat-
egy outperforms,” says Chris Senyek,
chief investment strategist at Wolfe
Research. “As goes value, so goes
dividend yield.”
A stock’s total return combines
two sources, one from dividends and
the other from price appreciation.
Over time, they can work hand-in-
hand to generate returns. Price ap-
preciation, however, was in short
supply for many dividend-paying
stocks this year before Nov. 9.
That was whenPfizer(PFE) and
BioNTech(BNTX) announced that
their Covid-19 vaccine in development
was more than 90% effective. “What
began as a gradual rotation into value
stocks really accelerated when Pfizer’s
news came out,” says Hank Smith,
head of investment strategy at Haver-
ford Trust.
From Dec. 31 of last year through
Nov. 6, the Russell 1000 Value Index
returned about minus 8%, versus plus
31% for its growth counterpart. It has
reversed since Nov. 6, however, with
Value Stock Rally Buoys
Dividend Payers’ Returns
Income investors finally get some
price appreciation to go along with
their yield, but strategists are split
on whether the run-up can go on
value returning about 9%, compared
with 2% for growth.
The initial vaccine news and some
other major positive headlines since
then have been catalysts for value
stocks, which are closely aligned with
dividend-paying stocks. If a stock has
a high yield, it can signify that it has
sold off considerably.
“The stocks that tend to have these
higher dividend yields tend to be lower
P/E stocks, and certainly they do tend
to be concentrated in some sectors that
are more value-based,” says Senyek,
pointing to financials and energy as
examples. Valuations remain stretched
on utility stocks, which tend to pay
dividends, making it harder to put
them in the value bucket.
Senyek in his research looks at the
top quintile, or 20%, of U.S. stocks in
terms of yield. That’s 1,000 compa-
nies, and their average yield is 3.5%.
While it’s a good representation of
dividend stocks, it doesn’t cover the
entire universe.
Those higher-yielding stocks tend
to be more beaten down than lower-
yielding names; hence, their value
bent and their better recent perfor-
mance during the rotation out of
growth stocks. “The [stocks] with the
very highest dividend yields are al-
most exclusively driven by large price
declines or a concern that this com-
pany may not be able to continue to
pay that dividend,” says Jonathan
Golub, chief U.S. equity strategist at
Credit Suisse.
Exxon Mobil(XOM), for instance,
is among the highest-yielding names
in the S&P 500 index and also the
subject of much debate among inves-
tors about the sustainability of its divi-
dend. The stock, which recently was
yielding about 9%, has returned about
minus 40% this year, though it’s up
double digits since earlyNovember.
The energy company has maintained
its quarterly dividend at 87 cents a
share, opting not to increase it for the
first timesince1982.
It’s important, Golub says, to make
distinctions among the different quin-
tiles of dividend yielders from the
highest to the lowest. But he urges
caution with the highest-yielding
stocks today. “If you want to go and
buy a high-dividend company, buy
something that’s yielding 3% to 5%,”
he says. “Those are high-yield plays,
but they are not as speculative” as
higher-yielding stocks.
TakeCoca-Cola(KO). While it
doesn’t fit the definition of a classic
value stock, given its price/earnings
ratio of 24.6 on next year’s FactSet
consensus profit estimate of $2.11 a
share, Coke attracts a lot of income
investors with its steady stream of
dividends. Haverford Trust has held
it since 1979.
Coke recently yielded 3.2%, double
the S&P’s average of about 1.6%, and it
has maintained its quarterly disburse-
ment this year at 41 cents a share.
Since Nov. 6, Coke shares have re-
turned 5.2%, compared with an 8.6%
decline from the beginning of the year
through Nov. 6.
Stocks such asAT&T(T),Pruden-
tial Financial(PRU),Gilead Sci-
ences(GILD), andHP Inc.(HPQ),
with their single-digit P/Es on 2021
profit estimates, hew more closely to
the traditional picture of a value stock,
as the accompanying table shows.
Still, the question remains of how
sustainable the nascent value rotation
will be.
At Last
The market’s recent rotation into value names has been a boon for many dividend
stocks, especially since the positive Covid vaccine news starting early last month.
Altria Group / MO $39.83 8.6% $74.0 8.7 -20.2% 6.9%
AT&T / T 28.75 7.2 204.9 9.0 -25.0 4.
Prudential Financial / PRU 75.62 5.7 29.9 6.5 -29.0 20.
KeyCorp/KEY 15.46 4.6 15.1 11.5 -34.0 22.
Gilead Sciences / GILD 60.67 4.5 76.1 9.2 -6.4 2.
U.S.Bancorp/USB 43.21 3.8 65.1 13.7 -31.6 10.
HP Inc. / HPQ 21.93 3.5 30.1 8.4 -3.7 13.
3M / MMM 172.73 3.4 99.6 18.3 -5.0 6.
PNC Financial Services Group / PNC138.07 3.3 58.5 17.8 -25.1 20.
Coca-Cola / KO 51.60 3.2 221.7 24.6 -8.4 5.
Company/Ticker Price Yield Value(bil) Ratio Nov.6 Nov.
Recent Dividend Market P/E Jan. 1- Nov. 6-
2021E Total Return
E=Estimate; Total return combines dividends and stock price appreciation; Data as of Nov. 30. Source: FactSet
“Dividend
yield as a
strategy
won’t work
unless value
as a broader
strategy
outperforms.”
Chris Senyek,
chief investment
strategist at
Wolfe Research
By LAWRENCE C. STRAUSS
I
ncome investors who came
for the dividends are finally
starting to see some of what
they’ve stuck around for
during a turbulent year:
price appreciation.
Earlier in the pandemic,
many companies cut or suspended
their payouts to save cash. And even
for those firms that maintained or
increased their dividends, stock gains
were hard to come by, as investors
favored a narrow slice of growth stocks
and certain companies that don’t pay
dividends, notablyFacebook(ticker:
FB) andAmazon.com(AMZN).
Now, thanks to the recent rotation
into value stocks, dividend stocks are
Illustration by L.J. Davidshot. The question now: Can the gains