We recently compiled a list of the 10 Most Promising Dividend Stocks According to Hedge Funds. In this article, we are going to take a look at where Broadcom Inc. (NASDAQ:AVGO) stands against the other dividend stocks.
During a time of great excitement about AI-driven capital gains, it’s crucial to remember that dividends have consistently played a vital role in total returns. Over the long term, dividends become even more significant. Looking back at the past few decades, approximately 55% of market returns from 1987 to the end of 2023 have come from reinvested dividends.
Dividends are a long-term investment strategy, and the benefits take time to materialize. For example, a dollar invested in the broader market in 1927 without reinvesting dividends would be worth $243 today, but if dividends were reinvested, that same dollar would be worth $3,737. Fortunately, you don’t need a century to see the potential growth in dividend stocks, as the outlook for the near future is improving. According to a report by AGF Investments, in the second half of 2024, global monetary easing has led to lower bond yields, making fixed income less attractive compared to dividend-paying stocks. In addition, companies with high dividend payouts often have more leverage, and lower bond yields help them manage interest expenses, boosting their overall financial performance, which in turn would contribute to dividend growth.
Also read:
8 Unstoppable Dividend Stocks to Invest in
According to a report by J.P. Morgan, global equities are on the brink of a significant period of dividend growth, not just due to a cyclical rise in payouts but also because of a more permanent increase in dividend momentum. Over the past two decades, global dividends per share have grown at an annual rate of 5.6%, but J.P. Morgan’s analysts now predict this rate will accelerate to 7.6% in the future.
The main factor driving this increased dividend growth is the low starting point for payout ratios (dividends relative to earnings). In 2020, during the pandemic, an unusual number of companies reduced their dividends. In fact, global dividends dropped by 12%, a sharper decline than during the Global Financial Crisis. This response was reasonable given the uncertain environment.
Since then, equity markets have rebounded strongly, with earnings surging, particularly from Big Tech and, more recently, AI. Dividends, typically set by cautious boards, tend to lag behind earnings during these surges. As a result, payout ratios are now close to 25-year lows, meaning companies are paying out less than historical averages, as reported by J.P. Morgan. Simply returning to more typical payout levels could result in an additional 2% growth annually over the next five years. This recovery is already taking shape, as global dividend growth has outpaced earnings growth in seven of the past eight quarters.
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