With the conclusion of the Fed's interest rate cycle program, dividend stocks are poised to shine once more. After a period of substantial rate hikes in recent years, we find ourselves at a pivotal turning point in the economic cycle. The data at hand reaffirms that the Fed's efforts have successfully tamed inflation by slowing down the economy. However, it's crucial to note that the data we currently observe has a lag of 4-6 months, which sometimes leads the Fed to tighten policy more than necessary, resulting in prolonged high rates.
As new economic data unfolds, it will become increasingly evident that the Fed has once again overshot its mark. In the coming months, we can expect the Fed to pivot towards rate cuts to bolster economic growth. Notably, with 2024 being an election year, the Fed may attempt to implement several rate cuts before the Fall, so as not to be accused of favoring the current administration.
The chart below, illustrates the performance of the S&P 500 Index versus the S&P 500 High Dividend Index, with recession periods overlaid. The blue line representing the S&P 500 High Dividend Index, designed as a benchmark for income-seeking equity investors, clearly outperforms the white line representing the broader S&P 500 Index. This finding may come as a surprise to investors who have primarily focused on the top-capitalization companies in the S&P 500 to the detriment of the rest of the market.
Furthermore, it's worth noting the remarkable performance of the high dividend index during post-recession periods when the Fed implements rate cuts to stimulate the economy. As interest rates decline, high dividend yields become increasingly attractive to income-oriented investors seeking stability. During economic slowdowns and recessions, growth companies often face challenges in their earnings, prompting investors to seek refuge in dividend-paying stocks.
Given these insights, now may be an opportune moment to reassess your portfolio allocation and consider overweighting high-yielding dividend-paying stocks.