Where to look for dividends now

Dividend income can help cushion volatile stock returns.

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Key takeaways

  • Dividend-paying stocks can potentially help reduce a portfolio's volatility and provide a degree of inflation protection.
  • While it can be tempting to look for stocks that pay the highest dividend yields, it's also important to consider the sustainability of a company's dividend.
  • Fidelity's portfolio managers have found opportunities in both defensive and economically sensitive sectors.

Stock investors face several difficult questions in 2023. Will this cycle of Federal Reserve interest-rate hikes and monetary tightening tip the US economy into a recession? How rapidly will the rate of inflation, still uncomfortably high, come down?

These questions are unanswerable, but some strategies can potentially hold up relatively well in multiple economic scenarios. One of these is investing in stocks that pay a rising stream of dividends.

Fidelity portfolio managers have identified companies with these traits in industries spanning the full breadth of the economy. Investors may want to consider whether an allocation to dividend-paying stocks merits a place in a diversified stock portfolio.

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A potential cushion for returns

One of the key attractions of investing in a portfolio of dividend-paying stocks is that it tends to dampen volatility and provide some potential downside protection. For one thing, companies that generate enough free cash flow to pay and increase dividend distributions with consistency tend to be stable businesses, and their stocks have historically tended to be less volatile than the overall market.

Then there is some basic math. A stock's total return is the sum of its dividend yield and its price appreciation (i.e., how much the stock itself rises or falls in value). Stock price movements are unpredictable and highly variable, but—if a company is financially strong and has a track record of maintaining and/or raising its dividend—investors can feel more confident in receiving at least the dividend yield, even in a trying market.

"Income from dividends is a head start in any market, which is why dividend-paying stocks have historically fared well in low-return markets and provided good downside risk protection in challenging markets such as 2022," says John Sheehy, manager of Fidelity® Equity Dividend Income Fund ().

High dividends versus stable dividends

While that math may make it tempting to seek out the highest dividend-paying stocks, this may not always be the most prudent approach. The highest-yielding stocks often tend to be either troubled companies or those with such a high payout ratio that they're unlikely to raise distributions.

"A high dividend yield means the market is worried about the sustainability of the yields," says Ramona Persaud, manager of the Fidelity® Equity-Income Fund () and Fidelity® Global Equity Income Fund ().

For this reason, it's important to also consider a company's financial strength and ability to continue paying its current level of dividend. "I look for the ability to maintain and grow dividends over time, which implies a resilient business model," says Sheehy.

Defense and offense

Zach Turner, manager of Fidelity® Dividend Growth Fund (), likes to divide the universe into 3 broad buckets: (1) defensive business models that are less sensitive to economic weakness; (2) economically sensitive businesses, which may experience large swings in earnings as the broader economy cyclically expands and contracts; and (3) businesses with a long-term growth tailwind, which can boost dividends across cycles.

One example of a defensive type of business is tax-preparation firm H&R Block (). People must file their taxes no matter where the US is in the economic cycle. And the company has been diversifying into small-business tax returns.

Health care is also a natural place to look for companies that are relatively immune to economic volatility, since patients tend to see their doctors and take their medicine regardless of the state of the economy. Cigna (), a leading health insurer, is one that has illustrated this phenomenon, as has Sanofi (), a French big pharma company with large franchises in vaccines, immunology, and diabetes treatments.

With the US economy slowing and expected to potentially enter into recession later in the year, it may seem like an odd time to look for opportunities among cyclically driven companies (meaning, those that tend to rise and fall with the broader economy). Yet some unusual situations have created potential opportunities.

For instance, demand for travel has come roaring back after a collapse in tourism and business travel during the pandemic. This could provide a tailwind for commercial aerospace manufacturers like Boeing () and General Electric ().

Searching for growing income streams

Dividends are paid from a company's cash flow, which is why dividend investors generally look for strong and resilient cash flows that can support a growing annual distribution.

Matt Fruhan, manager of Fidelity® Growth & Income Portfolio (), notes that elevated commodity prices have been helping generate very high free-cash-flow yields for energy producers.

"A decade's worth of underinvestment has led to a long-term supply/demand imbalance," he says of traditional energy supplies. "The shift to green energy is important to preserve the health of the planet," Fruhan adds, "but it's expensive and won't happen overnight. In the meantime, too little is being produced from traditional fossil fuels to keep pace with strong demand."

Persaud has similarly been drawn to the energy sector for its unusually high free-cash-flow yields, modest capital-investing plans, and ability and willingness to return capital to shareholders in the form of higher dividends and share buybacks. 

One oil giant that has illustrated this thesis is Exxon Mobil ().

While paying a dividend is typically associated with stable, mature, lower-growth businesses, there are also growth stories to be found—particularly among so-called "dividend growth" companies.

Compared to stable businesses with higher yields and payout ratios (meaning, how much of a company's earnings are paid out as dividends, rather than retained and reinvested in the business), dividend growth companies typically have faster-growing businesses with more opportunities for profitable reinvestment in the company. Hence, more of these stocks' potential returns may come from stock-price appreciation and less from dividend income than for a slower-growing income stock.

Technology companies including Microsoft () and Intuit () have exemplified these dividend-growth characteristics, as have some consumer discretionary plays including Domino's Pizza ().

Keeping up with inflation

One of the most vexing challenges facing investors today is high inflation. One potential edge that stock investments may have over traditional fixed income investments, like bonds, in the current environment is the ability to piggyback on inflation. Many companies can pass on higher costs by raising their prices, which can flow through to higher revenues, earnings, and a rising income stream that may keep up with or exceed inflation.

"I really like dividend stocks in this environment, since these are typically companies that have pricing power that can offer inflation protection and the ability to sustain dividends," says Persaud.

Naturally, some types of businesses have more pricing power than others. Fruhan is drawn to distribution companies serving various economic sectors—since distributors typically earn a fixed percentage of a rising price for the underlying products.

Fruhan has found such distributors in sectors including food, health care, and the HVAC industry. Companies that have illustrated this theme include Sysco (), a leading food distributor; McKesson (), in the health care space; and Watsco (), a large distributor of HVAC equipment and parts.

Helping investors navigate trying times

Persaud points to another reason why a dividend-focused mutual fund could be a helpful addition to some investors' toolkits in the current moment. As she puts it, a risk-aware income-producing portfolio can align "fund and investor experience"—by focusing not only on the goal of potential returns, but on providing a smooth journey to investors.

She breaks this down into 2 mechanisms, one internal to the fund and the other relating to investor behavior. On the first point, a portfolio with lower volatility and smaller drawdowns in times of market distress can generally provide a smoother ride for shareholders. In turn, that smoother ride may make it easier for investors to stay invested during trying times of market volatility—which should generally help improve long-term returns. (Studies have consistently demonstrated that investors' actual returns tend to lag funds' total returns, due to investors' tendency to sell low and buy high.1)

And in the current market climate, who doesn't want a smoother ride?

More on the mutual funds mentioned in this story

For the most recent information, please click on the fund trading symbol.

Top-10 holdings* presented are as of January 31, 2023.

Fidelity® Equity Dividend Income Fund (): 

  • 2.9% – Wells Fargo & Co. (
  • 2.8% – Exxon Mobil Corp. ()
  • 2.7% – Verizon Communications Inc. ()
  • 2.7% – Johnson & Johnson ()
  • 2.6% – Sanofi SA ()
  • 2.6% – Comcast Corp. ()
  • 2.5% – Unilever PLC ()
  • 2.1% – Cisco Systems Inc. ()
  • 2.0% – US Bancorp. ()
  • 1.8% – Microchip Technology ()

Fidelity® Equity-Income Fund (): 

  • 3.3% – Exxon Mobil Corp. ()
  • 3.2% – JPMorgan Chase & Co. ()
  • 2.4% – Bank of America Corp. ()
  • 2.0% – Johnson & Johnson ()
  • 2.0% – Danaher Corp. ()
  • 1.9% – Walmart Inc. ()
  • 1.8% – Linde PLC ()
  • 1.8% – Wells Fargo & Co. ()
  • 1.6% – T-Mobile US Inc. ()
  • 1.5% – Cigna Group ()

Fidelity® Global Equity Income Fund ()

  • 4.3% – Apple Inc. ()
  • 3.5% – Microsoft Corp. ()
  • 1.7% – Taiwan Semiconductor Mfg. Co. Ltd. ()
  • 1.7% – UnitedHealth Group Inc. ()
  • 1.6% – Exxon Mobil Corp. ()
  • 1.6% – JPMorgan Chase & Co. ()
  • 1.5% – Eli Lilly & Co. ()
  • 1.5% – Danaher Corp. ()
  • 1.4% – Bank of America Corp. ()
  • 1.4% – Roche Holding AG ()

Fidelity® Growth & Income Portfolio (): 

  • 7.6% – Exxon Mobil Corp. ()
  • 5.6% – Microsoft Corp. (
  • 5.4% – Wells Fargo & Co. ()
  • 4.4% – General Electric Co. ()
  • 2.9% – Apple Inc. ()
  • 2.8% – Bank of America Corp. ()
  • 1.9% – Comcast Corp. ()
  • 1.9% – Visa Inc. ()
  • 1.8% – Hess Corp. ()
  • 1.8% – Bristol-Myers Squibb Co. ()

Fidelity® Dividend Growth Fund (): 

  • 5.3% – Microsoft Corp. ()
  • 2.2% – UnitedHealth Group Inc. ()
  • 2.2% – Visa Inc. ()
  • 2.2% – Cigna Group ()
  • 1.6% – Bristol-Myers Squibb Co. ()
  • 1.5% – Boeing Co. ()
  • 1.5% – Allison Transmission Holdings Inc. ()
  • 1.5% – Keurig Dr Pepper Inc. ()
  • 1.4% – Energy Transfer LP ()
  • 1.4% – Exxon Mobil Corp. ()

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