Hawkish FOMC means more tailwind for dividend stocks

The FOMC’s decision on Wednesday to hike the US policy rate by another 75 basis points and sending a hawkish signal through its dot-plot and economic forecasts (read our in-depth take on the FOMC decision in our Thursday Quick Take note) will add more tailwind for dividend stocks. The reason for that is that higher interest rates will reduce equity valuations through a higher discount rate on future cash flows. Lower equity valuations will, all things being equal, have a larger impact on higher P/E ratio companies than those with low P/E ratios, because high P/E companies have a larger part of their value coming from cash flows expected far into the future.

As our table below shows, the dividend aristocrats generally have lower valuation multiples and thus have less interest rate sensitivity. In addition, higher interest rates coupled with potential recession and uncertainty lift the value of companies with higher more predictable income stream in the short-term. It is worth noting that over the past five years, global dividend stocks have delivered a significantly worse return for shareholders than the global equity market.

There are many ways to define good dividend paying companies and in this equity note we have focused on the SPDR S&P 500 Global Dividend Aristocrats UCITS ETF, but there is also the iShares MSCI World Quality Dividend ESG UCITS ETF which focuses on companies with high dividend yield and quality characteristics (strong return on capital and strong balance sheets). Below we have listed the 10 largest holdings in each ETF.

SPDR S&P 500 Global Dividend Aristocrats UCITS ETF – 10 largest holdings

• H&R Block
• LTC Properties
• South Jersey Industries
• Unum
• Universal
• Pinnacle West Capital
• Northwest Bancshares
• IBM
• OGE Energy
• Spire

MSCI World Quality Dividend ESG UCITS ETF – 10 largest holdings

• Microsoft
• Apple
• Roche
• Cisco
• AbbVie
• Merck
• Texas Instruments
• Unilever
• Qualcomm
• Novartis

The chart below shows the 5-year weekly prices on the SPDR S&P Global Dividend Aristocrats UCITS ETF

* S&P Global defines dividend aristocrats as the highest dividend yielding companies within the S&P Global Broad Market Index (BMI) that have followed a policy of increasing or stable dividends for at least 10 consecutive years.