In what’s been a rough year for equities, dividend stocks and the related exchange traded funds are among the market’s bright spots.

That positive sentiment has been fueled by the ascent of the S&P 500 to record highs and strength in high-dividend stocks — a trend running counter to rising interest rates. Additionally, dividend stocks are usually less volatile than their non-payout counterparts.

Some market observers believe the good times will continue for dividend equities in 2023, due in part to modest payout growth and investors searching for ways to boost total returns.

“Savita Subramanian argues that we are in a total return world and sees 3% dividend growth in 2023 despite a 9% drop in earnings,” according to Bank of America research. “Dividends are scare with just 16% of S&P 500 stocks sporting a dividend yield above 4%. Two-thirds of equity returns came from dividends during much of the 20th century, compared to just 14% over the past decade. The dividend yield factor also typically outperforms in a Late Cycle regime.”

Another point in favor of dividend stocks is that many with that label reside in value sectors, and some market observers believe the current run of value stocks outperforming growth counterparts is just getting started and could be persistent for years to come.

Value sectors such as healthcare and financial services are homes to slews of dividend-growers, and elevated oil prices are supporting shareholder rewards in the energy sector, which is another value destination. Speaking of dividend growth, it’s a vital part of long-term total returns.

“Annual dividend growth averaged 6.2% between 1970 and 1980 after an overvalued, concentrated market corrected sharply. Price returns only averaged 3% per year over the same decade. Similarly, dividends grew by 6.2% on average between 2000 and 2007 while annual price returns averaged just 2.5%,” added Bank of America.

Adding to the allure of dividend stocks is timing. Dividend growth stocks often offer solid inflation protection, and payout equities in general usually perform well coming out of turbulent economic climates.

“Dividends tend to increase after periods of market tumult to attract investors back to shares,” concluded Bank of America. “Secular shifts between price return and dividend growth leadership are also evident. Since 1872, annual dividend growth has averaged 4.3% compared to 6.3% price returns.”

Dividend funds include the T. Rowe Price Dividend Growth ETF (TDVG)  and the T. Rowe Price Equity Income ETF (TEQI) .

Photo by Moritz Knöringer on Unsplash

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