INVESTING
should benefit industrial companies .
Michael Clarfeld , a portfolio manager at ClearBridge Investments in New York City , shares a similar sentiment . “ Some sectors that have sold off in 2023 as interest rates rose look attractive right now ,” he says , singling out so-called bond proxies such as utilities , REITs and energy infrastructure companies . These have “ come under some knee-jerk selling pressure as investors extrapolate the consequences of higher rates ,” he says .
He has reduced his exposure to “ highmultiple names ,” he says , and instead favors lower-priced dividend growers . Specifically , he likes two energy infrastructure providers : Sempra , a San Diego-based company whose stock has been basically flat this year , and Enbridge , a Calgary , Alberta , company whose shares were down about 13 % for the year by mid-November .
However , not everyone is dismissive of growth sectors . “ We have a favorable outlook on technology ,” says Mike Barclay , lead manager of the Columbia Dividend Income Fund at Columbia Threadneedle Investments in Boston . “ It ’ s a long-term growth sector , and companies have been increasingly focused on returning capital to shareholders via dividends .”
Many tech companies , he says , have strong free cash flow , attractive freecash-flow margins , low payout ratios , and strong underlying fundamentals — factors which “ support higher dividend growth in the long term ,” he says . “ Stocks that can consistently grow dividends over time typically outperform bond proxies like utilities ,” he explains .
Growth Potential Other sectors enjoy growth potential as well , according to advocates . “ Sectors
“ Dividend growth alone is not the only reason we purchase a stock . Valuation is a key determinant to the long-term performance .”
— Pranay Laharia that have been punished in a narrow and momentum-led market will outperform ,” says Matthew Wittmer , a portfolio manager at Allspring Global Investments in Minneapolis . “ Specifically , we find compelling value in financials , industrials and energy .”
Companies in these sectors , he explains , have been demonstrating longterm fiscal discipline . They are especially attractive now , he says , for their “ total return potential ,” which he defines as their ability to pay a sustained and increasing dividend on top of the likelihood that they will return capital to investors through stock buybacks .
Yet buybacks aren ’ t attractive for all dividend investors . “ Buybacks suggest a company ’ s good times were yesterday ,” says Simeon Hyman , global investment strategist at ProShare Advisors in Demarest , N . J . “ Dividend increases indicate a company ’ s confidence in the future .”
Jeffrey Buchbinder , chief equity strategist at LPL Financial in Needham , Mass ., says , “ Dividend growth [ is ] a better opportunity for earnings-driven appreciation in the coming year than bond-proxy sectors like utilities .”
Even if interest rates fall in 2024 , he says , utilities “ would likely be a strong performer after lagging so much this year , but may still have a hard time keeping up with the big growth sectors , [ which have ] the most earnings growth potential .”
Valuation Matters
But rising dividends may not be enough to interest some portfolio managers . “ Dividend growth alone is not the only reason we purchase a stock ,” says Pranay Laharia , a manager at Barrow Hanley Global Investors in Dallas who works with the firm ’ s dividend-focused value strategy . “ Valuation is a key determinant to the long-term performance .”
Value stocks , he says , are currently at a “ historically wide valuation discount ” to growth stocks . “ The time is ripe for value to start outperforming growth .”
Discounted valuations matter to many
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44 | FINANCIAL ADVISOR MAGAZINE | DECEMBER 2023 WWW . FA-MAG . COM