Here Are A Few Stocks That Perform Better After Raising Their Dividends

In Morgan Stanley's latest research, raising dividends for companies do more than offer investors higher income - the stocks of those companies also outperform the market over the next six months as a result of the dividend increase. 

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In an environment of rising interest rates and higher dividend yields, investors are seeking dividend stocks with higher yields than their peers, but it is also important to recognize the effect the market will have on the market's reaction. 

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Companies that increased their dividends saw a 6.9% increase in the stock price in the six months following the announcement, according to a study conducted by Morgan Stanley that looked at relative price returns among Russell 1000 constituents without dividends. It was reported that Morgan Stanley reviewed data between 2014 and 2022, focusing on relative price returns. 

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Those companies, however, were underperforming even more sharply than those that cut their dividends, falling by 9.6% six months after they announced their decisions. 

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As Todd Castagno, strategist at Morgan Stanley, recently noted, "Dividend increases lead to higher returns, whereas dividend cuts portend lower returns, on average," he said. 

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The data showed that the higher the dividend increases, the greater the increase in share prices - with the reverse also being true - and that this correlation also held true when looked at even closer. 

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The note noted that the company that announced a dividend increase of 75% or more, on average, outperformed the average six months afterward by 14.2%. Meanwhile, the company that announced a smaller increase, up to 10%, outperformed by 1.7%, the note continued. 

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It was also reported that companies that announced dividend cuts greater than 50% saw an average drop of 16.8% in their share prices. 

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A company that conducted a study on investment behavior found that sectors mattered as well. Investors were more inclined to react positively to companies that raised their dividends in sectors such as energy, IT, and materials.

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As a result, Morgan Stanley has discovered several companies that recently raised their dividends by at least 10%, and the names of those companies are listed below. 

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• Tractor Supply Co

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• Analog Devices Inc

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• Charles Schwab Corp

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• LPL Financial Holdings Inc

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• Ares Management Corp

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• Monolithic Power Systems Inc

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• Occidental Petroleum Corp

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• SLB

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• Constellation Energy Corp

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• DICK’S Sporting Goods Inc

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In February, Analog Devices increased its dividend per share by 13%, which was followed by a 15% increase in the stock price of the semiconductor manufacturer this year, which is up about 15% from its debut price. This stock yields 1.8% and has been up about 15% since its debut. 

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Additionally, Bank of America recently reiterated its buy rating on the stock, stating that the stock is positioned to grow at double-digit rates thanks to its high cash flow returns and various growth opportunities. 

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The company doing business as Schlumberger might also outperform its peers, according to Morgan Stanley. Its dividend yield is 2%, and it has been increasing its dividend per share by more than 40%. Shares of the company are declining nearly 6% a year after they raised it by more than 40% in February. 

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The Goldman Sachs analysts said this week that investors should buy Schlumberger calls ahead of Schlumberger's latest earnings statement later this month, claiming that as rig construction activity abroad increases, there will be a significant improvement in Schlumberger's margins. 

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The dividend yield of Constellation Energy increased in February to 1.5%, from the previous yield of 0.75%. While its shares have fallen 11% thus far this year, UBS said it thinks it is the top beneficiary of the Inflation Reduction Act for 2023 and beyond. 

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There are a number of other stocks on this list, including Dick's Sporting Goods and Tractor Supply Company.