Four trends in the yield landscape

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Particularly in the financial, energy and healthcare sectors, investors can look forward to healthy dividend growth this year, according to Capital Group.

Rising bond yields and higher inflation do not have to be bad for dividend stocks at all. Capital Group summarizes in the publication Rotates to dividends in an inflationary world Four trends in the dividend universe that investors can take advantage of.

Positive correlation between dividend yield and bond yield

For most of the past 30 years, dividend stock yields and yields on U.S. government bonds have had a negative relationship. In the last two years, that relationship has been reversed. High-yield stocks now have a positive correlation with bond yields. If this trend continues, higher interest rates will dampen the outlook for dividend stocks less than before.

Still, it is important to keep an eye out for heavily indebted companies or excessive relative debt on their balance sheets when interest rates rise.

Yields are rising, but at a slow pace

Many companies take a more thoughtful approach after their experiences during the low point of the pandemic, where they had to cut or even cut in their dividends significantly. With global economic growth slowing, some companies prefer to maintain liquidity in the event that the slowdown is longer than expected. Some sectors, such as the travel sector, still face a high degree of uncertainty.

Still, 98 of the 242 companies that suspended or cut their dividends in 2020 have resumed their payments, and only three companies have cut their dividends in 2021. Pricing companies are likely to be in a better position to increase dividends.

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Very cyclical companies choose variable dividends

Especially in cyclical sectors, some companies innovate by balancing their business needs with the obligation to pay dividends. Take the mining sector, which experienced a boom in dividend payments in 2021. In recent years, many large mining companies, such as Rio Tinto and Vale, have gone from a progressive dividend policy to a payout percentage. This allows these types of companies to sustainably manage their balance sheets and cash flows over multiple commodity cycles.

Opportunities in the financial sector, energy and healthcare

Finance, energy and healthcare represent a significant part of the dividend-paying universe, and in each of these sectors, a confluence of factors seems to support an increase in dividends.

Financial companies
Rising interest rates should help the more interest-sensitive banks in the US and Europe expand their margins, which have been pressured by persistently low interest rates for years. This can result in stronger earnings, better dividend flows and higher valuation multiples.

Energy
The big oil companies have long been good sources of consistent returns for income-oriented investors. These energy companies have also become more disciplined in their energy supply, limiting their investments in existing reserves and looking for new oil wells.

healthcare
Healthcare companies can be a source of both earnings growth and dividend growth in the current inflationary environment. Pharmaceutical companies have historically had relatively strong pricing. While the industry has been under political pressure on drug prices, the more innovative pharmaceutical companies are likely to be able to raise prices at modest levels.

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That Editors of IEXProfs consists of several journalists. The information in this article is not intended as professional investment advice or as a recommendation to make specific investments. Editors may hold positions in one or more of the listed funds. Click here for an overview of their investments.

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