The Attraction to Stable Dividend Growth

Many people believe equities have gone nowhere the last two months.

It may look that way, but money rarely leaves the market – it rotates. And right now, we’re witnessing one of the largest rotations in recent memory into dividend growth stocks.

The Attraction to Stable Dividend Growth

As was made pretty clear with the June consumer price index data, the Federal Reserve set to begin easing. So, the attraction to stable dividend growth makes intuitive sense – it’s reflected in sector returns since the June CPI report:

The money that’s rotating out of mega-cap technology stocks is being sprinkled throughout dividend growth areas.

From July 11 – Sept. 4, income-oriented equities like real estate, utilities, financials, staples and health care have been heavily accumulated while tech has been crushed.

Without question there’s a monumental money shift into dividend growth stocks.

On the surface, the S&P 500 didn’t really budge. But underneath, a lot’s been happening.

On July 3, the S&P 500 was up almost 17%, but breadth was weak as just 20.5% of stocks in the index were outperforming the broad index and the average stock’s return was 5.2%:

Today, the index is up still about 17%. But now 35.5% of stocks are outperforming the index and the average stock return has basically doubled:

More Upside for Dividend Growth Areas

Market breadth is in much better shape. And with rates coming down, that could mean more upside for dividend growth areas.

For instance, using the Real Estate Select Sector SPDR Fund (XLRE) as a proxy, real estate stocks have taken off since the June consumer price data:

Utilities have drawn interest too (using the Utilities Select Sector SPDR Fund (XLU) as a proxy):

We’ve also seen it in financials (using the Financial Select Sector SPDR Fund (XLF) as a proxy):

Lastly, high-quality health care dividend stalwarts are surging as well (using the Health Care Select Sector SPDR Fund (XLV) as a proxy):

Speaking of health care, one stock in particular that’s both a growth powerhouse and a dividend grower that’s been attracting Big Money for years is Eli Lilly and Company (LLY). It has strong sales, growing earnings, and a history of dividend growth.

Each green bar is what we believe to be institutional buying in the last year:

That huge buying makes sense when you realize LLY revenues went from $24.54 billion in 2020 likely more than $57 billion in 2025. Its net income was $6.2 billion in 2020 and is projected to be $20.24 billion in 2025:

With numbers like that, dividends tend to follow. And they have: in 2018 the payout was $2.25 per share, it’s likely to reach $5.20 in 2024.

It’s not surprising LLY has been an outlier at MAPsignals, with many Top 20 buys in the last six years:

The Rotation is Spreading

It kicked off with small-caps and now the rotation is spreading into yielding equities.

Real estate, utilities, financials, and health care are in bull market mode. As interest rates are set to dump, these income plays jump.

Focus on dividend growth and superior businesses over the highest yields.

Trust the MAPsignals process to find where the Big Money flows!

If you’re a serious investor, Registered Investment Advisor (RIA), or a money manager looking for hedge-fund quality research, get started with a MAP PRO subscription today.

Disclosure: the author holds no positions in LLY at the time of publication.