Having strongly underperformed the wider stock market in 2020, high-dividend stocks have shown early signs of a rebound in recent weeks. There is a good chance for this dynamic to continue. Dividend cuts and suspensions have started to normalize, and the ongoing low-interest-rate environment and the recent tightening in credit spreads should tempt investors back towards dividend payers.
It’s normal to see a trickle of companies cutting or suspending their dividends. But from March through April last year, that trickle turned into a tsunami, as COVID-19 hammered businesses forcing many to cut and suspend capital distributions in order to protect their balance sheets. In the second half of 2020, the pace of dividend cuts and suspensions eased, and more typical dividend patterns have started to return (Display, left scale). The improved global economic outlook for 2021 and strong corporate earnings growth forecasts should support this development. Yet, the dispersion of returns in 2020—or “performance gap” between high-dividend stocks and the broad equity market—was the widest it has been in 20 years (Display, right scale).