Shares of utility companies and real estate investment trusts, both well-known for their high-dividend payouts, have seen lackluster performance recently. However, there is potential for a turnaround if upcoming economic data proves to be positive.
Sector Performance Analysis
The Utilities Select Sector SPDR exchange-traded fund has experienced a 3.6% decline over the last year, in stark contrast to the Real Estate Select Sector SPDR ETF, which has posted a 4% increase compared to the impressive 29% gain of the S&P 500. Investors have shown a preference for technology and industrial stocks due to long-term earnings growth prospects driven by factors like artificial intelligence and infrastructure investments.
Market Dynamics
Despite a recent decrease in bond yields, with the 10-year Treasury yield dropping from a multi-month high to 4%, utility companies and REITs have failed to keep pace with the overall market. However, this trend is expected to change as the attractiveness of dividends from these companies increases when long-term bond yields decrease.
Dividend Outlook
The utilities ETF is projected to yield around 3.7% this year. With consistent dividend growth over the past decade and stable earnings, the average annual yield is slightly higher than the current one-year yield. This indicates the potential for improved performance in the near future.
REITs and Real Estate ETFs
REITs are in a similar boat. The real estate ETF, which includes REITs and other real estate companies, has a 3.3% dividend yield. Payments have grown in eight of the past 10 years and they’re expected to grow this year on the back of consistent earnings growth from increases in rents. While some areas of commercial real estate have seen less demand and slight rent decreases, residential rents have continued to rise in the past couple of years.
Driving Down Bond Yields
The question now is what can drive bond yields downward even more, making those dividend yields even more competitive with Treasuries?
The answer lies in inflation data. Price growth has been trending lower over the past year and a half. February’s Consumer Price Index, set to be released next week, is expected to gain 3.1% year over year, according to FactSet. If the data comes in lower than expected, the 10-year yield could drop on expectations of a more dovish Federal Reserve, boosting utilities and REITs with yields that compare more favorably to bonds.
22V Research’s Dennis DeBusschere thinks utilities and REITs are two groups worth a look ahead of the CPI data, noting their sustainable dividend growth. DeBusschere’s data show that dividend stocks broadly haven’t gained as much as they historically do when yields dip in the past few weeks.
If yields dip further on the report, expect these dividend payers to pop.
