A new era is coming for dividend stocks — and it's good news for income investors, says portfolio manager

Published Fri, Jan 12 20242:11 PM EST

Investors seeking income in the stock market have reason to cheer, according to author and portfolio manager Daniel Peris. He's predicting a major paradigm shift in the market as dividends come back in vogue. "Conservative, self-proclaimed dividend investors are going to have access to more companies over time," said Peris, author of the new book, " The Ownership Dividend ." As additional stocks start offering the payouts, the S & P 500 's dividend yield should move higher, he said. It currently yields just under 1.5%, and he sees a world where it can reach 3.5%. How the shift will come about It used to be the norm that most companies paid dividends, but dividend-focused investing has been out of favor for about 30 years, Peris said. These days, about 80% of S & P 500 stocks pay a dividend. About half of the Nasdaq 100 companies pay a dividend. Falling interest rates, as well as the rise of stock buybacks and Silicon Valley tech companies helped propel the change, he explained. That led companies to think they could get away with less and less cash payments over time, added Peris, who is a senior portfolio manager and head of the strategic value dividend group at Federated Hermes. Among the funds he manages is the firm's U.S. Strategic Dividend exchange-traded fund (FDV) . Geopolitics also played a role, he said. "Dividends were old fashioned compared to the march of capital and globalization of trade and deregulation, everything that characterized that period from 1980 to 2020," Peris said. That has now come to an end, he said. Income investors also now have choices, as the Federal Reserve's interest rate hikes helped propel bond yields higher. While the central bank is expected to start cutting rates sometime this year, they aren't expected to go as low as they once were in the zero-rate environment. "Investors will increasingly put pressure on, through their preferences, the Googles of this world to join that fray," Peris predicted. Google-parent Alphabet , Meta and Amazon are among the Big Tech names that don't pay dividends. "These non-dividend-paying companies or de minimis dividend-paying stocks are going to have to compete on the basis of cash just like every other asset… and they're going to move in that direction," he said. That said, Peris doesn't expect the change to come overnight. "Will we get back to the very, very high rate of companies that pay dividends as opposed to a much lower rate currently? Over time, yes," he said. Payout ratios are currently around 30% to 35% and could go up to 50% or 60% over time, he noted. "How long can Wall Street hold back the tide?," he said. "I don't know the answer. Wall Street's been pretty good at holding back the tide, but eventually the tide will prevail." Investing in dividend stocks Still, just because a company offers a dividend doesn't mean it is a good investment. Fundamentals matter. Peris said investors should pay attention to company balance sheets, although it was the income statements that have been the focus for the past 15 years. "I would encourage investors to be less focused on quarterly top line, and more focused on — how's the balance sheet doing, leverage. A lot of companies are working that down," he noted. He'd also look at companies that have more control of their value chain, which he said should allow them to have stable pricing. "Those companies will do well in the years and decades ahead," he said. "Outsourcing everything just to get some desirable operating margin worked well for years and years and years," Peris said. "I think a lot of that is going to be brought in, and you're going to see more companies asserting more control over their value chains."