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Equity Perspectives

If the U.S. economy continues to chug along at the same time as rates decline, both dividend growers and high-growth stocks may offer potential investment opportunity.

Historically, falling interest rates have accompanied periods of economic or market uncertainty, and are driven typically by a U.S. Federal Reserve (Fed) rate cut to stimulate economic activity or by an investor flight to safety.

In these falling rate environments, dividend growers (stocks of companies with a history of consistently paying and growing their dividends) tend to be among the best performing equities for two reasons:

  • During periods when yields in general are declining, a stock with a history of steadily growing dividends becomes relatively more attractive for investors.
  • Dividend growers tend to be blue-chip companies with stable businesses whose stock has a history of not only weathering bouts of volatility but also participating in market rebounds. Naturally, investor demand for these equities tends to increase during periods of uncertainty.

 

Table 1. Historically, Dividend Growers Have Performed Well in Declining-Rate Periods
Performance of dividend growers during the three most recent periods of declining interest rates.*

Source: Lord Abbett: Dividend Growers are defined as companies in the S&P 500® Index or S&P 400® Index that paid a dividend and increased their yearly dividend payout for 10 consecutive years.  *Measured by a decline of 50 basis points or more on the 10-year Treasury yield since 2016.

 

A Unique Falling-Rate Environment
However, as the market continues to price in a fed funds rate cut in 2019 while the U.S. economy continues to chug along, there remains the potential for a unique falling-rate environment characterized by supportive monetary policies and a stable economic backdrop.

In this scenario, the market leaders of the past several years, high-growth stocks, may continue to lead equities higher for two reasons:

  • Growth stocks tend to be long-duration investments by their nature with investors pricing in years, if not decades, of future growth into the share prices of these securities. Lower long-term interest rates make the long-term return potential of these stocks more attractive as a result.
  • Meanwhile, a backdrop of moderate growth in U.S. gross domestic product and corporate profits tends to make the earnings and revenue growth potential of the fastest-growing stocks relatively attractive to investors.

Summing Up
Historically, falling rates have been associated with equity market uncertainty. High-quality dividend growers have tended to be among the best performers in such an environment, helping to mitigate volatility and providing investors with a relatively attractive income stream. However, we may be entering a unique falling-rate environment where supportive monetary policy drives rates lower while moderate economic and earnings growth continues to support equities. This potential outcome could favor high-growth stocks.

In either scenario, we think the long-term appeal of dividend growers (the potential for market upside with less volatility over a full cycle) and high-growth equities (the opportunity to participate in game-changing innovation) remains in place.

 

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.

No investing strategy can overcome all market volatility or guarantee future results. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

basis point is one one-hundredth of a percentage point.

Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

Dividend yield is equal to the dividend divided by the stock price. Dividend yield is one measure of a stock's value. A high dividend yield may indicate that a stock is relatively inexpensive.

Dividend policy: A stock is classified as a dividend payer if it paid a cash dividend any time during the previous 12 months, a dividend grower if it initiated or raised its cash dividend at any time during the previous 12 months, and non-dividend payer if it did not pay a cash dividend at any time during the previous 12 months.

The S&P MidCap 400® Index, more commonly known as the S&P 400, is a stock market index from S&PDow Jones Indices. The index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect deduction of fees and expenses and are not available for direct investment. 

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

ABOUT THE AUTHOR

RELATED FUND
The Calibrated Dividend Growth Fund invests primarily in stocks of large U.S. companies that have a history of increasing their dividends. Learn more.
RELATED FUND
The Lord Abbett Growth Leaders Fund Class A seeks to deliver long-term growth of capital by investing primarily in stocks of U.S. companies. Learn more.
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