BlackRock sees 'advantageous' trade in dividend stocks next year

The stocks that appeal to investors looking for a steady stream of income are back in favor and may continue to beat bonds in a world of historically low rates, according to BlackRock Inc.

After several companies cut or suspended their dividends earlier in the year and “arguably scared investors away,” expectations for payments have stabilized, said Tony DeSpirito, chief investment officer of U.S. fundamental active equity at the world’s biggest asset manager. That’s good news for high-dividend companies at a time when interest rates around the globe are set to stay low for longer, he added.

“Investors will increasingly come to the view that it’s not only safe but advantageous to return to dividend payers,” said DeSpirito, who oversees $137.3 billion in assets at BlackRock. “Company dividends are likely to provide better income than bonds for some time.”

While BlackRock doesn’t disclose its top picks for next year, it lists Citigroup Inc., Verizon Communications Inc. and Bank of America Corp. among BlackRock Equity Dividend Fund’s largest holdings as of Nov. 30.

Investors seeking reliable income have been coping with anemic bond rates amid easy monetary policy and unprecedented support from central banks during a pandemic that’s ravaged the global economy.

Dividend stocks are among the opportunities to add yield to portfolios, UBS Global Wealth Management chief investment officer Mark Haefele wrote in a note to clients. While rates on 10-year Treasuries are below 1%, the S&P 500 Utilities Index is on track to pay a dividend yield of about 3.4% this year.

After dipping to $39.05 a share in early April, the amount of dividends expected from S&P 500 companies this year has jumped to $57.95 a share. That’s encouraging, especially when it comes to companies that typically don’t show rapid growth, but offer higher cash payouts.

[More: Dividend income is a new minefield for financial advisers]

The S&P 500 Dividend Aristocrats Index — consisting of companies that have increased payouts for at least 25 straight years — has climbed about 65% since the market bottomed in March. That’s in line with the advance in the American stock benchmark. However, they’ve lagged behind high-flying technology companies that are flush with cash and can thrive even during challenging economic times. The NYSE FANG+ Index of giants such as Apple Inc. and Facebook Inc. has soared over 125% in the span.

While the economic rebound is still struggling amid a resurgence in coronavirus cases and threats of tougher restrictions, prospects for fresh stimulus combined with the vaccine rollout could help spur a rotation from megacap tech shares into other companies.

Investors have recently tiptoed back into value stocks — those that typically trade at low prices relative to their earnings. As the economy gets out of a rut, those companies could enjoy a larger bounce, DeSpirito said. In addition, many of the COVID-19 beneficiaries are low-dividend payers, and that creates a gap for “dividend growers to fill,” he added.

[More: Morningstar and iShares team to revamp indexes]