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Tapping the potential of companies that pay growing dividends
Market Outlook

Tapping the potential of companies that pay growing dividends

Discover the opportunities that growing dividend-paying companies present for investors’ portfolios due to the low valuations at which they trade.
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19 APR, 2024

By Winnie Kwan


Amid the exuberance of growth stocks, the valuation gap between dividend-paying stocks and the broader market peaked in 2020, and has been gradually narrowing ever since. This gap led to the emergence of valuation opportunities in sectors such as healthcare, industrials and energy. Investing in a wide range of dividend opportunities offers the potential to reap various benefits from a potential valuation reversal in the markets.

Under-appreciated, but not forgotten

As investors get caught up in the fervour of artificial intelligence, valuations of dividend-paying stocks have quietly drifted towards multi-decade lows compared to the broader market.
However, amid the exuberance of growth stocks, valuation opportunities have emerged in other sectors, such as healthcare, industrials and energy.

The combination of low valuations and supply constraints has created several attractive opportunities in US and European energy companies. The US medical technology sector is also interesting for 2023 declines despite continued innovation.

Dividend growth drivers in innovative industries

Patience is a key factor when investing in innovative companies, including those in the biotechnology field. The biotech sector has been affected by the high interest rate environment, but interesting opportunities can still be found. When biotech companies become mature organisations, they can generate plenty of cash and show solid improvement in operating margins; all of this takes time.

Seek dividend opportunities in unduly punished sectors

Capital Group's analysis shows that companies that grow their dividends tend to be of higher quality and characterised by a better allocation of their capital. This is because they tend to generate earnings growth and free cash flow that support dividend growth.

At Capital Group, our research team strives to study the quality of dividends. We group them according to their unique characteristics. One group consists of companies with growing dividends. These are companies that typically increase this type of shareholder payout over time and generate risk-adjusted returns above those of the broader market. Given that many of them have been negatively impacted by the general stock market decline in dividend stocks, these stocks are certainly an interesting area in which to look for opportunities.

Valuations of large dividend payers are well below market average.

P/E of high dividend stocks versus S&P 500 index (%)
P/E of high dividend stocks versus S&P 500 index (%)
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