Dividend stocks are presenting a great buying opportunity, as the hype surrounding AI makes dividend stocks look old-fashioned, an article in Barron’s contends. As investors rush to buy tech stocks that promise advancements in AI, the Nasdaq 100 has gained 30% so far in 2023 while the rest of the market recedes into the shadows, including dividend stocks. But though the iShares Select Dividend ETF has fallen 9% so far this year, it’s currently paying out a yield of 4.5%. Likewise, the ProShares S&P 500 Dividend Aristocrats ETF is down nearly 2%, but holds stocks that have consistently increased their payouts for at least 25 years straight.
Part of the driver back into tech stocks after last year’s rout is the expectation that the Fed will stop their rate hiking cycle. But while stocks that offer little or no dividend are up 10% this year, stocks that have the biggest yields have fallen roughly 6%—a 16 percentage point gap, with the difference between the Nasdaq 100 and the iShares Select even more disparate, at 39 percentage points. That substantial gap has created a good time for investors to look at yield again, the article maintains.
There are risks to dividend stocks; they could be a better bargain if they underperformed by another 10 to 15 percentage points, and investors are still nervous about bank stocks given the recent turmoil in the regional bank sector. Energy companies have also been impacted by falling oil prices. Short-term Treasuries, which are currently yielding about 5%, might provide temporary shelter, but their attractiveness will disappear once the Fed stops raising rates. And there is an abundance of dividend-paying stocks to choose from outside of the energy or banking sectors, Barron’s reminds us. Nervous investors should choose the ProShares S&P 500 Dividend Aristocrats over the iShares Select Dividend ETF, as the former offers high-quality stocks instead of the highest-yielding stocks which are sometimes “cheap for a reason,” Chris Senyek of Wolfe Research wrote recently. The Dividend Aristocrats ETF may also do well if the Fed continues to raise rates, as investors will be looking for companies that offer steady dividend payouts—something that is in style no matter what the latest tech trend may be.