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There’s a difference between a “bad” investment and one that’s a laggard. For better or worse, the latter is the accurate descriptor for the broader universe of dividend equities in 2024.
I’m not picking on it, rather just highlighting it because it’s largest exchange traded fund in the category, but the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG) is up 20.4% year-to-date, as of Nov. 22. A solid showing to be sure, but one that trails the S&P 500 by 510 basis points. In fairness to VIG, the Vanguard ETF’s annualized volatility this year is 240 basis points below that of the S&P 500.
And in fairness to dividend investing as a style, 11 months isn’t a fair measuring stick. As advisors know, this is a long-term investing methodology and 11 months isn’t long-term. Actually, there’s a compelling case for dividend investing as advisors and investors set out on the task of identifying opportunities for 2025. Consider the following: S&P 500 payouts are likely to continue rising and while Election Day volatility is in the rearview mirror, policy uncertainty could come into play next year, bolstering the case for dividend stocks along the way.
Speaking of Uncertainty…
In theory, there shouldn’t be much domestic political turbulence in 2025 because Republicans control the presidency and both houses of Congresses. That could set the stage of extension and potential expansion of the Tax Cuts and Jobs Act (TCJA) of 2017.
However, while markets like political certainty, there aren’t guarantees of its in 2025 despite the aforementioned scenario. The extent, if any, to which President-elect Trump pushes for trade tariffs isn’t yet known. Outside of this country, if the events of last week are any indication, the incoming Trump Administration could have its hands full dealing with the war in Ukraine. As Denise Chisholm, director of quantitative market strategy for Fidelity, points out, dividends often serve investors well following periods of uncertainty.
“If it seems rational and prudent to wait on the sidelines for some certainty, history illustrates that looks like the riskier proposition," she said in a recent report. "Historically the higher the starting point of uncertainty, the better the forward returns are likely to be."
Obviously, it’s not 2025 yet and no one knows exactly how the macroeconomic and geopolitical environments are going to play out. What is clear is that predictable cash flows, quality and strong balance sheets are always in style.
Interest Rates Could Help
Working on the premise that Trump doesn’t push new tariffs, those levies don’t prove inflationary or inflation remains otherwise tame, the Federal Reserve is likely to continue lowering interest rates in the first half of 2025.
As Fidelity fund manager Ramona Persaud observes, dividend equities, particularly of those of the quality varietal, can benefit from lower interest rates and that could contribute to wider breadth for the broader market.
“She adds that declining interest rates may support gains across a broader range of stocks—a significant change from much of the past 2 years, when market gains have been primarily concentrated among a handful of mega-cap growth shares,” adds Fidelity.
Related: Stand Out: Why Advisors Shouldn’t Be Just Another Firm