Show Me The Growth! 3 Reasons Why Dividend Stocks Are Losing Favor In Choppy Times

Investing in dividend-paying stocks has proven to be a lucrative strategy for investors, particularly in times of economic uncertainty.

Amidst economic anxieties last year due to soaring inflation and aggressive rate hikes by the Fed, investors sought refuge in dividend stocks that offered the allure of consistent returns.

However, there seems to have been a change of heart among investors regarding their investment preferences.

What Happened: According to a note from Ned Davis Research, non-dividend-paying stocks in the S&P 500 have outperformed dividend stocks, with a combined 18% gain compared to a more modest 4% gain for income stocks in 2023, as reported by the Wall Street Journal.

This marks the weakest first-half performance for dividend stocks relative to their non-dividend-paying counterparts.

See Also: Best Dividend Paying Stocks

The Journal stated that currently, around 80% (400 companies) of the S&P 500 companies pay dividends.

Despite the economic conditions not improving significantly, dividend stocks have lost their appeal. The Federal Reserve, under Chair Jerome Powell, has maintained a hawkish stance, pausing rate hikes in June for the first time in the current tightening cycle.

The trajectory of the economy remains uncertain, with economists and analysts divided on the possibility of a recession.

Why It's Important: Investors are now turning their attention to growth-focused tech stocks, particularly those involved in artificial intelligence, as per the report. Investors are captivated by the potential future profits rather than focusing on immediate returns.

Ed Clissold, the chief U.S. strategist at Ned Davis Research, reportedly said, “Economic growth has been positive but low, so investors have piled into a few companies that they think can deliver the growth.”

“People aren't buying AI stocks because they're excited about their dividend.”

The report highlighted that companies like Nvidia Corp. NVDA, which has experienced a meteoric rise in share price this year, have a dividend yield of only 0.04%. Apple, Inc. AAPL, which has surged approximately 49.7% year-to-date, has a dividend yield of just 0.5%.

Dividend Dwindling? The report also attributed the poor performance of dividend stocks to the significant pullback in regional banking stocks during the earlier banking crisis this year and the decline in energy stocks due to lower crude oil prices.

According to the report, total returns from Zions Bancorp ZION, Comerica Inc. CMA, and Citizens Financial Group, Inc. CFG fell by 44%, 35%, and 32%, respectively. These total returns include dividends and stock price appreciation.

The report also noted a decline in total returns from Occidental Petroleum Corp. OXY, Exxon Mobil Corp. XOM, and Valero Energy Corp. VLO by 6.1%, 1.2%, and 6%, respectively.

Another factor contributing to the underperformance of dividend stocks is the relatively attractive yield offered by risk-free government bonds for the first time since the 2008 financial crisis, funneling investment dollars away from these stocks and into Treasury bonds.

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