NEW YORK, July 2 (Reuters) – Expectations that Treasury yields could remain low in the second half of the year are leading some investors to review companies with dividend distributions exceeding those offered on US government bonds.

The ProShares S&P Dividend Aristocrats ETF – a measure of companies that have increased their dividends each year for the past 25 years or more – is up 14.3% this year, compared to a 15.8% increase for the S&P 500 benchmark.

Some investors believe these stocks could be a good bet in the coming months, however, as a more hawkish tone from the Federal Reserve and signs of spike in growth shake expectations that Treasury yields will resume a surge that started in the first trimester but died more recently. down.

The S&P Dividend Aristocrats Index pays a dividend yield of 2.15%, while the 10-year Treasury pays a dividend yield of 1.48%. The S&P 500 Dividend Aristocrats ETF remains around 4% below its May high.

“Increasingly, the market will focus on companies with the potential for increasing earnings and current increasing returns,” said Bob Leininger, portfolio manager at Gabelli Funds.

Overall, dividend payouts in the S&P 500 will rise 6% this year and next, well above the 0.8% growth rate implied by current valuations, Goldman Sachs estimates . Of the 57 companies that cut or suspended their dividends in 2020, 22 have resumed or increased their dividends and 19 more are likely to increase their dividends by the end of the year, the firm estimates.

Financial firms are likely to pave the way for higher dividends after the Federal Reserve eases limits on payments and redemptions, noted Mark Haefele, chief investment officer at UBS Global Wealth Management.

Companies such as Goldman Sachs Group (GS.N), Morgan Stanley (MS.N), JPMorgan Chase (JPM.N) and Bank of America (BAC.N) said on June 28 that they were increasing their payments after they overwhelmed the stress of the Fed. tests, which assess how companies would fare in the event of a severe economic downturn. All in all, the total buybacks and dividend payouts from financial companies will likely reach $ 130 billion, analysts estimate.

Leininger said he was starting to target companies such as brewer Molson Coors Beverage Co (TAP.N), which suspended its dividend last year but said in April that he planned to reinstate it by end of 2021.

Shares of the company are up nearly 19% for the year to date.

Dividend-paying stocks are trading at less than 18 times forward earnings, a slight discount from their historic median, increasing their appeal in a market where valuations are high from historical levels, said Katie Nixon , Director of Investments for Northern Trust Wealth Management.

“We expect dividends to rise at a rate greater than inflation over the next several years, providing investors with the opportunity to generate their own cash flow in a world lacking in yield,” she said.

Investors could get a more in-depth look at the Federal Reserve’s perspective on inflation when the minutes of its latest meeting are released on Wednesday, while the ISM reading of service sector activity is expected to be released on Tuesday. The index hit a record high in May as the economic recovery gathered pace.

Dividend-paying stocks appear to be in an ideal situation, offering stable payouts that are expected to rise if the economic rebound continues, said Burns McKinney of NFJ Investment Group.

McKinney is looking at companies that suspended or cut dividends during widespread economic lockdowns last year and will likely increase them this year.

“You have a number of companies that are going to keep up with inflation and you are going to be rewarded in the meantime” with increased dividend payments, he said. This includes companies such as industrial company Honeywell International Inc and technology company Broadcom Inc (AVGO.O) as well as the energy sector S&P 500, he said.

Reporting by David Randall; Editing by Cynthia Osterman

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