Investors are selling IT stocks and buying dividend stocks. Why are they attractive again?

Investors, who decided to get rid of shares of technology giants after months of rally on the topic of artificial intelligence, switched to protective assets, and one of the beneficiaries were shares with high dividend yields. And the demand affected securities from different sectors - from energy to utilities. What fuels their interest in "old economy" companies?

Amid growing uncertainty about the sustainability of the AI rally, traders have been switching to more defensive assets in recent weeks, Bloomberg reports. The Magnificent Seven index has shed about 7% since peaking on October 29, and the correlation between it and defensive sectors has fallen to 80%, the publication adds, citing data from 22V Research. This indicates a shift in attitudes toward risk, with technology returning to its more traditional role as a growth sector and investor attention shifting to stable health care, consumer staples and utilities sectors with high dividend yields. For example, in "old economy" companies like Exxon Mobil, JPMorgan Chase and Procter & Gamble: their businesses are less sensitive to the economic cycle.

According to Bloomberg Intelligence, the "high dividend yield" factor has become the second most effective among all investment strategies tracked by the publication. For example, shares of one of the oldest and largest chemical corporations in the U.S., DuPont de Nemours, which give investors a 4.2% annualized yield, rose by 13% over the month.

"The main trend right now is moving into industries that return a lot of cash to shareholders," noted 22V Research. Their Cash Return factor, which takes into account dividends and buybacks, was up 1.4% for the week and 2% for the month - while broad market indexes are moving down.

"Investors often favor dividend stocks when overall market valuations look stretched. These stocks typically trade at lower multiples, and stable cash flows help mitigate volatility," said Christopher Kane, U.S. equity market quantitative strategist at Bloomberg Intelligence.

Additional interest in dividend stocks is due to the fact that the market is no longer confident in the near-term reduction of Fed rates at the next meeting on December 10. Treasury yields have fallen to multi-month lows, and against that backdrop, dividend yields look particularly attractive. "If the Fed doesn't let the economy overheat, investors will reallocate money into higher-quality assets that consistently return cash to shareholders. And that's exactly what's happening now," Kevin Brox, director of 22V Research, told Bloomberg.

However, the dividend strategy has challenges. Over the past 50 years, the total dividend yield of the S&P 500 has fallen to its lowest levels, Bloomberg adds, citing data from Trivariate Research. The average payout ratio has fallen to 1.14%, a level not seen since the dot-com bubble burst in the early 2000s. This is partly due to large tech companies: they need significant amounts of cash for AI projects, so they are less likely to announce dividends and buybacks.

This article was AI-translated and verified by a human editor