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Once undervalued, dividend stocks are narrowing the gap
Marc Nabi
Equity Investment Director
September 11, 2024

For the better part of the past 15 years, dividend stocks have lingered in the shadow of growth stocks that powered ahead. As the chart shows, the valuation gap across high-paying dividend stocks is now narrowing. Take utilities for example, often omitted from the conversation of growth stocks, many across the sector appear poised to benefit from increasing electricity demand, largely driven by the growth of data centers for artificial intelligence. The S&P 500 Utilities Sector Index, which yields 3%, is up 20% year-to-date as of September 5, outpacing the 16.5% gain of the S&P 500 Index. 


Valuations for high dividend equities are climbing

The line chart illustrates the forward price-to-earnings (P/E) ratio of high dividend stocks relative to the overall market, represented by the S&P 500 Index. The x-axis shows a timeline from 1980 to June 2024 and the vertical axis shows the percentage difference in P/E ratios between negative 40 and 5. A line charts the difference in P/E ratios between stocks in the S&P 500 with the highest dividend yields compared to the broader index. The line fluctuates significantly. Notable dips occur below a horizontal line, which represents an average P/E ratio difference of negative 13%. The dips suggest times when the broader S&P 500 was preferred to high dividend payers. The largest dips occur around 1999 and 2020.

Sources: Capital Group, Goldman Sachs. Data as of June 30, 2024. High dividend stocks refer to the cohort of stocks in the S&P 500 Index with the highest quintile dividend yield (sector-neutral) within the index. The line represents smoothed six-month average. P/E ratio = price-to-earnings ratio.

We’re keeping an eye on other market opportunities, especially semiconductor and aerospace companies that have introduced or increased dividends. Oil companies have exhibited better capital discipline by integrating dividends into their capital allocation plans. European and U.S. banks may also boost dividends at a faster pace, given stronger capital ratios and balance sheets. Overall, the S&P 500 is expected to post a 6% increase in dividend payments for 2024, versus a 5.1% rise in 2023, according to S&P Global. Free cash flow levels for S&P 500 equities are also in good standing, providing companies with the optionality for shareholder-friendly initiatives such as dividend payments. 


As the Fed is poised for a rate cut, undervalued dividend-paying stocks could present an attractive opportunity. Market concentration in large technology stocks is a key issue for investors, and dividend-paying equities can benefit from longer term tailwinds, such as reshoring of supply chains. 


With over $6 trillion sitting in money market accounts, according to the Investment Company Institute as of September 5, investors may seek alternative income sources if they begin to see the yields on those balances drop. Additionally, any moderation in economic growth could shift their focus on near-term cash flows and dividend-paying companies to boost returns. 


Marc E. Nabi is an equity investment director and portfolio strategy manager with 35 years of investment industry experience (as of 12/31/2023). He holds an MBA in finance from New York University and a bachelor’s degree in accounting from the University of Michigan, Ross School of Business.

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The S&P 500 Index is a market-capitalization-weighted index based on the results of 500 widely-held common stocks.


The S&P 500 Utilities comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard utilities sector.


Past results are not predictive of results in future periods.

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