DIVIDENDS OUT OF FAVOR | CROUCH CONNECTION | SEPTEMBER 2023 "ADV"

DIVIDENDS OUT OF FAVOR

Investing in dividend paying stocks has been out of favor in 2023. Technology stocks and consumer discretionary stocks (think retailers), on the other hand, have done well. The technology SPDR ETF is up 40% year-to-date as we write this. Utilities, one of our favorite sectors and one of the best places to be in 2022’s selloff, have gone nowhere. So what should we do with our fallen heroes?

DIVIDENDS WILL RETURN

Kiplinger says dividend investing may be going through a rough patch this year, but “investors should exercise patience.” Historically interest rate sensitive, the dividend stocks have lagged as interest rates have run up. Businessinsider.com sums up:

“While the news hasn’t been great for dividend investors this year, don’t give up hope, especially for the long haul. It’s very normal for different asset classes to rotate in and out of leadership, and it’s a safe bet that dividend stocks will eventually start performing better. In addition, you can scoop up many dividend payers at attractive valuations right now.”

Barron's Magazine says it even more directly:

“Investors should take advantage of the selloff. The outlook for utility earnings is probably the best it’s been in decades as the build-out of wind and solar power combined with the construction of new transmission lines should power steady profit gains.

‘We expect utilities on average can deliver annual earnings and dividend growth in the 5% to 9% range,’ says John Bartlett, portfolio co-manager of the Reaves Utility Income fund.”

Our back-of-the-envelope math suggests that the move to electric vehicles will accelerate the need for more electric power generation, possibly as much as 25% more than we currently produce. Some estimates I have seen say we will need 50% more power…that bodes well for utility profits.

Deborah Bickerstaff, Senior Vice President and Portfolio Manager at Federated Hermes, one of our favorite investment houses, said in an interview recently:

“Frankly, I am pounding the table on the opportunity that is being presented in dividend, high quality companies right now. We are all in business to buy low and sell high at the end of the day. And when you have a broad market that is advancing on such narrow leadership, and everything else is left behind, it becomes very easy to see the opportunity that is being presented to you from a valuation perspective…dividends are on sale…I suggest they are for the next decade.”

BUT WHAT ABOUT THE BUDGET CEILING DEBATE?

Market watchers are increasingly focused on the negotiations in Washington over the budget ceiling threatening to shut down the US government, possibly by the end of September.

While we certainly have more acrimony between the parties in Washington than in recent memory, negotiations are ongoing to reach a compromise to continue funding government spending. We have had short-term freezes in spending in similar situations in the past, but the stock market is usually the winner by sending a shock to the negotiators in the form of a market correction. While these corrections are not pleasant, they rarely last very long, and then Congress increases the budget ceiling.

One theory has it that it may be a “bad news is good news” event. While the market has been fighting the Fed this year, The Fed officials have given no sign of backing off of their interest rate tightening campaign. In fact, they continue to threaten higher interest rates if inflation doesn’t return to their 2% target. But the Fed doesn’t usually reverse course unless there is a market event (correction) to tell them they have gone too far. The debt ceiling may provide them that message.

If we do have a market reaction to a standoff in Washington, that may put the correction behind us and clear the way for a year-end rally. Typically, the year before a Presidential election is very good for the stock market because the President’s party spends money freely to stimulate the economy. They are certainly doing that this year, and it appears that the market may reward them.

THE TURTLE WINS THE RACE

Even though it is fun and exciting to have stocks like Nvidia, the darling of the recent artificial intelligence madness, in your portfolio, staying well diversified in well-researched, high-quality companies and riding out the ups and downs of the market has historically been the most consistent to build wealth. Predicting the timing of a correction and rebound is not possible (I have tried every technique ever invented, mostly unsuccessfully).

Equity markets generally bottom before the real economy which makes the timing the market very challenging. Equity market recoveries can be very quick, and missing those recoveries can be very costly. We believe staying invested and opportunistically adding new funds to your portfolio so that we participate in a likely year-end rally.

We welcome your calls if you need encouragement. Always give us a call if we can assist in any way.

Sincerely,

Dave Crouch Kim Blackburn Kay O’Connell

Registered Principal Branch Operations Manager Financial Advisor

Financial Advisor

BUFFET QUOTE:

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

WARREN BUFFETT

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Dave Crouch and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Aspen Grove Asset Management is not a registered broker/dealer and is independent of Raymond James Financial Services.