High dividends for stagflation | Looking for Alpha

By Matt Wagner

The subject of stagflation and comparisons to the 1970s has recently come to a head.

For the first time in decades, concerns about out-of-control inflation, a lagging Federal Reserve and a slowing economy are causing stocks and bonds to fall.

The main arguments behind the arguments for stagflation are a flat – and briefly inverted – yield curve that indicates expectations of an impending economic downturn coupled with soaring energy prices.

Treasury yield curve

WTI spot oil price per barrel

While stagflation may not be the baseline scenario for many investors, the breakdown in that scenario now requires at least some thought.

Sector allocations

According to Bank of America research, the best performing sectors during stagflation have always been utilities, energy and commodities. The worst were consumer discretionary, information technology and communication services.

Year-to-date performance so far has favored stagflation havens. Energy (+34%), Utilities (+3%) and Materials (+3%) were the best performing sectors, while Consumer Discretionary (-18%), Technology information (-20%) and communication services (-24%) were the worst.

Year-to-date sector returns

The sector’s performance can arguably be explained as much by concerns of stagflation as by a rotation from growth to value after the multiples of the growth index stretched considerably and the forward price/earnings ratio of the Russell 1000 Growth Index (32.0x) peaked at more than twice the multiple of the Russell 1000 Value Index (15.8x) last November.

Relative P/E ratios: Russell 1000 Growth/Russell 1000 Value

Amid this rotation, high dividends – which tend to favor value – have been one of the best performing pockets of global equity markets.

Year-to-date factor index return

Sector allocations in the WisdomTree US High Dividend Index are well aligned with the sectors that BofA research shows tend to benefit the most from a stagflation environment. The index has a combined 35% overweight in energy (+14%), commodities (+11%) and utilities (+10%).

Index sector weightings

For clients considering how to allocate in a world of slow economic growth and persistently high inflation, an allocation to high dividend payers may be the ideal solution.

By comparison with the experience of the 1970s, the two quintiles with the highest dividend yields easily outperformed the market, and the companies with the lowest dividend yields lagged.

Cumulative Total Returns

Important risks related to this article

There are risks associated with investing, including possible loss of capital. Funds concentrating their investments in certain sectors increase their vulnerability to any unique economic or regulatory development. This can lead to greater stock price volatility. Dividends are not guaranteed and a company currently paying dividends may stop paying dividends at any time. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Matt Wagner, CFA, Partner, Research

Matt Wagner joined WisdomTree in May 2017 as an analyst on the research team. In his current role as Partner, he supports the creation, maintenance and reconstitution of our actively managed indices and ETFs. Matt began his career at Morgan Stanley, working as an analyst at Treasury Capital Markets from 2015 to 2017, where he focused on the planning, execution and risk management of unsecured financings. Matt graduated from Boston College in 2015 with a BA in International Studies with a concentration in Economics. In 2020, he earned a Certificate in Advanced Assessment from NYU Stern. Matt holds the Chartered Financial Analyst designation.

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