US Investors Shun Dividend Stocks Amid AI Boom in First Half of This Year

Analysis suggests that dividend stock investments have been dampened this year due to the clear rally in artificial intelligence (AI)-related stocks.

The Wall Street Journal (WSJ) reported on the 2nd (local time), citing Ned Davis Research, that in the first half of this year, the stock prices of S&P 500 companies that do not pay dividends rose 18% compared to the beginning of the year, while dividend stocks only increased by 4%. This performance of dividend stock investments is the worst level since 2009 compared to non-dividend-paying companies. Currently, about 400 companies included in the S&P 500 index pay dividends.

WSJ stated, "Stocks of companies boasting high dividends were among the most popular trades in last year's market, but since then, dividend-preference strategies have disappeared," adding, "Investors have shunned dividend stocks due to the AI boom."

[Image source=Reuters Yonhap News]

At the beginning of the year, concerns about Federal Reserve (Fed) tightening led to expectations that the poor performance of technology and growth stocks would continue as it did last year. However, as expectations grew that AI would lead a new computing era, rallies in related stocks such as Nvidia stood out. Consequently, the tech-heavy Nasdaq index soared about 32% to close the first half, and the S&P 500 index also jumped nearly 16%. Individually, Nvidia rose 189%, Meta Platforms increased 138%, Amazon went up 55%, and Apple climbed 49%.

Ed Clissold, Chief U.S. Strategist at Ned Davis Research, said, "Investors focused only on a few companies they believed could drive growth," and added, "Buying AI stocks is not due to expectations of dividends." Some of the technology stocks that rallied in the first half currently pay dividends, but investors did not prioritize this in their investment decisions. Nvidia, leading the AI boom, has a dividend yield of 0.04%. Apple’s is 0.5%, and Broadcom’s is 2.2%.

WSJ diagnosed that the recent sharp decline in regional bank stocks also partly contributed to the poor performance of dividend stocks in the first half. The total return of Zions Bancorporation, considering dividends and capital gains, fell 44% this year. Comerica and Citizens Financial Group also dropped 35% and 32%, respectively. Energy stocks, which led the market last year and were considered top dividend stocks, showed a downward trend in stock prices this year.

Additionally, rising government bond yields have influenced the investment atmosphere. Dividend-paying companies now compete with government bonds to attract investors. According to LSEG Refinitiv, U.S. mutual funds and exchange-traded funds purchasing dividend stocks recorded a net outflow of $4 billion this year, contrasting sharply with the nearly $70 billion inflow recorded last year.

However, this trend could reverse. Typically, dividend stocks are defensive and attract attention during uncertain markets or when entering a recession. With ongoing recession concerns amid the Fed’s tightening stance, if a recession scenario materializes, investors may flock back to companies emphasizing dividends. Moreover, concerns have grown that some big tech stocks like Nvidia and Meta have become excessively overvalued due to the recent rally. WSJ noted that Nvidia is currently trading at 47 times its expected earnings over the next 12 months, pointing out that it could be vulnerable in a recession.

Paul Baoci, Senior ETF Strategist at SS&S ALPS, said, "I don’t think the first six months of 2023 have changed the overall outlook on dividends," adding, "Most of the returns from stock portfolios come not from actual price increases but from dividends accumulating over time."

This content was produced with the assistance of AI translation services.