As the Federal Reserve starts to cut interest rates, it makes sense that investors might turn to dividend stocks. After all, dividend payers should benefit as lower bond yields offer less competition. In addition, they can be a defensive play if the economy falls into a recession.
However, the reality is more nuanced, according to Ned Davis Research. What can make the difference between those that outperform and those that do not is how aggressively the Fed slashes rates, Ed Clissold, the firm's chief U.S.
strategist, said in a July 31 note. The macro team at Ned Davis Research is expecting the central bank to lower rates at a slow pace of three or four cuts over the next year. In slow tightening cycles, fast dividend growers have outperformed slow growers and high yielders, the firm found in its analysis.
The fastest growers are defined as the top 25% of the S & P 500 payers by trailing one-year dividend growth, while the slowest are the bottom 25%. The fastest growers have outperformed the slowest growers during the first year of easing cycles, but their "strongest and most persistent relative strength" has occurred during the first six months, Clissold explained. "In a slow cycle, economic growth remains positive but generally is moderating and in that environment investors tend to put a premium on growth of all kinds — earnings growth, sales growth but also dividend growth," he said in an interview with CNBC.
"Companies that can still grow their dividend in that environ.