AT&T and Other Dividend Stocks Are Struggling. That Could Spell Opportunity.

But this isn’t the time to give up on dividends as a healthy payout stream.

Last year, investors piled into dividend stocks for their defensive qualities and income. This year, it’s a different story: Dividend payers congregate in value sectors such as financials, energy, and utilities that have lagged behind growth sectors such as tech. Investors have also had plenty of choices for finding yield without taking on risk, including certificates of deposit (CDs) and Treasury bills.

“When you are competing with T-bills and CDs at 5%, that makes the environment for dividend paying stocks complicated,” said Jamie Cox, managing partner for Harris Financial Group. The yield on the

SPDR S&P 500 exchange-traded fund

(SPY) is 1.4%.

That has led some investors to take a pass on dividend stocks.

“After great performance last year, dividend stocks have given back a great deal of their relative advantage,” said David Katz, chief investment officer at Matrix Asset Advisors.

The

Vanguard High Dividend Yield Index ETF

(VYM) is up 0.8% this year while the

SPDR S&P Dividend ETF

(SDY) has gained 0.7%, lagging behind the S&P 500’s 19% gain. Ditto the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which is up 6.7% The dividend aristocrats are companies that have paid out a higher dividend each year for at least 25 straight years.

Despite their woeful underperformance this year, investors should still consider including dividend-paying stocks or funds in their portfolios, analysts advise.

“This is an exceptionally good time to be taking advantage of the recent underperformance and to be buying dividend stocks,” said Katz. “There will likely be a significant market rotation toward many areas that have lagged behind in the first part of the year. This should include financial and healthcare, industrials, and utilities.”

Katz doesn’t own shares of AT&T or Verizon—and continues to be wary of the stocks. But he is excited about healthcare stocks, in particular

Medtronic

(MDT) and

Pfizer

(PFE), which have “good long-term prospects and healthy yields.” Other dividend-paying companies Katz likes include

American Electric Power

(AEP),

Bank of New York

(BK),

PNC Financial Services Group

(PNC), and Qualcomm (QCOM).

“Key to investor success in this space is to focus on industry leaders with strong and growing cash flows, strong balance sheets, and a commitment to maintain and grow their dividend,” he added.

Harris Financial Group’s Cox said investors should also consider dividend-paying stocks in the technology sector, including

Apple

(AAPL) and

Microsoft

(MSFT). “If there’s any sector that’s most misunderstood as dividend oriented, it’s tech,” he said. “A lot of people regard tech as low-dividend paying whereas there are plenty of dividend-paying stocks in the large-cap arena these days.”

Tech stocks—most notably the so-called Big Seven, which includes Apple, Microsoft,

Alphabet

(GOOGL),

Amazon.com

(AMZN), and others—have powered the market higher this year. But a market rally driven by just a handful of stocks is often thought to last for only so long. 

“Looking forward, we think that dividend stocks will come back into favor as the economy slows and as investors look to diversify beyond tech stocks,” said Chris Senyek, chief investment strategist at Wolfe Research.

Senyek prefers a broad, diversified dividend-investing theme over individual stocks. “In today’s environment, where an investor can earn nearly 5% in T-bills or a money market account, the threshold for investing in individual high-paying dividend stocks is getting a lot higher,” he said. One way for investors to gain broad exposure to dividend stocks is by owning the

ProShares S&P 500 Dividend Aristocrats ETF

(NOBL).

Quincy Krosby, chief global strategist for LPL Financial, said there is another compelling reason investors—especially newer investors—shouldn’t shun dividend stocks: the power of compounding dividends. Reinvesting the dividend income back into a portfolio will provide even faster growth.

Compounding is “a major component of investing in dividend-paying stocks,” she added.

Write to Lauren Foster at [email protected]