The growing interest in equity income strategies and the emergence of the tech sector as a dividend player have Fidelity Investment's James Morrow excited about the prospects of dividend-paying stocks.
More than $21 billion has flowed into equity income funds over the 12-month period ending in May, according to Morningstar Inc. That may seem like small change compared to the $172 billion investors pulled out of all stock mutual funds over the same time period, but according to Mr. Morrow, who was named lead manager of the $8.3 billion Fidelity Equity-Income Fund Ticker:(FEQIX) in October, the flows are a sign that “underinvested bulls” have started sniffing around.
“There's a lot of investors who like the strategy, but just aren't fully there yet,” he said. “When asset allocation models shift, which they have done toward equity income, it takes time.”
A seismic shift in the tech sector should also whip up investor demand for shareholder payouts. “It used to be that if a tech company had a dividend, it was mature and had stopped growing,” Mr. Morrow said. But that line of thinking has changed over the past year as tech giants Apple Inc. and Cisco Systems Inc. began paying dividends.
“There's been a literal sea of change in tech,” Mr. Morrow said. “It's hard not to get excited about the new willingness of tech to pay a dividend and it's hard not to get really excited about the ability of tech companies to increase payouts, given how much cash is on their balance sheets.”
The rise of the tech sector as an option for equity income couldn't have come at a better time. Financials, which historically have dominated equity income funds, are stuck in a “no man's land,” Mr. Morrow said. “Regulators won't let them pay out dividends and without them, they're too risky to own.”
The momentum in equity income strategies can be attributed in part to real estate investment trusts and master limited partnerships, two asset classes best known for their yields, which have seen their valuations skyrocket and yields plummet accordingly. That, in turn, has sent investors looking elsewhere for yield. Equity income funds also tend to have low volatility, a feature that has become more attractive given the roller-coaster ride that badly rattled stock investors last summer.
Dividend-paying stocks also should perform well in a rising-interest-rate environment, which could spell trouble for bonds.
“The first 200 or 300 basis points of rising interest rates will most likely be because the global economy is getting better,” Mr. Morrow said. “That's a very bullish scenario for stocks. Some people seem to have forgotten why they liked stocks in the first place. It's that they can go up, too.”