Dividend stocks are struggling in 2023. Although the second half of the year may be better, it’s been a volatile ride so far. This is the first time we have had a rising interest rate environment like this period in many years.

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Rising rates may make the risk-free return of U.S. Treasury bills and bonds attractive. The 3-month bill is yielding 5.63%. As a result, investors ask why to buy stocks when they can get better yields now. In fact, you can lock in 4.5%+ for ten years or 30 years.

But a few reasons exist to buy dividend growth stocks. First, many are undervalued and have the highest yield in a decade. One does not have to look far for bargains. 

Next, the stocks still generate passive income that grows with time because of dividend increases. Something that does not occur for T-bills and bonds. 

Third, dividend growth investing takes time and is not a get-rich-quick scheme. 

Lastly, as pointed out by John Bogle, total returns are approximated by the sum of earnings growth, price-to-earnings ratio expansion or contraction, and the dividend yield. Low valuations and high dividend yields suggest higher future returns.

Stock Market Overview

As shown by data from Stock Rover*, the stock market had another mixed week, with some indices and composites gaining and others losing. The Nasdaq Composite also had a positive week as tech stocks surged, followed by the S&P 500 Index. The Dow Jones Industrial Average (DJIA) declined. The Russell 2000 was the worst-performing index.

Three of the 11 sectors gained this week, while the remainder fell. Technology, Communication Services, and Healthcare led the way. But the Utilities, Consumer Defensive, and Energy sectors performed worst. In fact, Energy was down 5.3% in aggregate because oil prices plunged.

Oil prices were down nearly 9% for the week to ~$92 per barrel. The VIX increased 2.3% because of investor fear. However, it is still near the long-term average. Gold continued its decline to $1,847 per ounce.

The Nasdaq is performing the best for the year, followed by the S&P 500 Index, the Dow 30, and the Russell 2000. Despite recent weakness, the Nasdaq remains in a bull market. In addition, six of the 11 sectors are up year-to-date. The three best-performing sectors are Technology, Communication Services, and Consumer Cyclical. But the worst-performing sectors are Consumer Defensive, Real Estate, and Utilities.

The dividend growth investing strategy has returned to positive results across all categories. The recent market volatility has lowered returns, but the trend has reversed. The table below shows their performance by category.

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 24.60X, and the Schiller P/E Ratio is about 29.45X. These multiples are based on trailing twelve months (TTM) earnings.

The long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent correction and a bear market and rebound. Earnings multiples of more than 30X are overvalued based on historical data.

Manufacturing PMI

The ISM® (Institute for Supply Management®) Manufacturing PMI® reported at 49.0% for September, as business activity increased (+1.4%) from the previous month. A value below 50% is indicative of a shrinking economy. “The U.S. manufacturing sector continued its contraction trend but at a slower rate, recording its best performance since November 2022, when the PMI® also registered 49.0%. Companies are still managing outputs appropriately as order softness continues. Still, the month-over-month PMI® improvement in September is a clear positive,” said Timothy Fiore, the ISM® Manufacturing Business Survey Committee chairman. Of the six biggest manufacturing industries, only Food, Beverage & Tobacco Products, and Petroleum & Coal Products recorded growth in September. 

The forward-looking new orders sub-index contracted for the 13th consecutive month, increasing (+1.4%) and improving to 49.2%. The Prices Index, which measures what companies pay for raw materials and other supplies, reported up (+4.6%) to 43.8%; the reading shows raw material pricing dropping for the fifth consecutive month. The Employment Index moved into expansion territory and increased (+2.7%) to 51.2%. The Backlog of Orders Index dropped (-1.7%) to 42.4% and has now contracted for the twelfth consecutive month following 27 months of expansion. The reading is indicative of output exceeding demand.

Oil Inventories

The US Energy Information Administration reported that US commercial crude oil inventories decreased by 2.2M to 414.1M barrels (5% below the five-year average) for the week ending September 29th. This is the lowest level since December 2022. The drop in crude oil inventories is attributable to a 944K barrels per day (bpd) increase in oil exports to 4.95M bpd, while net crude imports fell 1.95M bpd to 1.26M bpd. Gasoline inventories increased by 6.5M barrels (1% above the five-year average), and distillate inventories decreased by 1.3M barrels (13% below the five-year average). Total commercial petroleum inventories increased by 4.6M barrels. 

Crude oil refinery inputs averaged 15.6M bpd, a decrease of 463K bpd as compared to the previous week’s average. Refineries operated at 87.3% of their operable capacity, as gasoline production decreased to an average of 8.8M bpd and distillate fuel production fell to an average of 4.7M bpd. Crude oil imports came in at 6.2M bpd, a decrease of 1M bpd compared to the previous week. Crude oil imports averaged about 6.9M bpd over the last four weeks, 9.6% more than last year. Total motor gasoline imports averaged 919K bpd, and distillate fuel imports averaged 85K bpd.

Jobs Report

The U.S. Bureau of Labor Statistics reported 336,000 jobs were added as the unemployment rate remained at 3.8% in September. July and August’s employment readings were revised for a combined (+119,000) more jobs. The number of unemployed workers was little changed at 6.4 million. Leisure and hospitality (+96,000) led the way in job gains, followed by government (+73,000), health care (+41.000), professional, scientific & technical services (+29,000), and social assistance (+25,000). 

Among the unemployed, the number of permanent job losers decreased (-48,000) to 1.45M, and the number of reentrants to the labor force increased (+113,000) to 2.04M. The labor force participation rate was unchanged at 62.8%, leaving it still below the pre-pandemic level of 63.4%. Average hourly earnings increased by 0.2%. At $33.88, average hourly earnings are up 4.2% from a year ago. The average hourly earnings growth reading was the lowest monthly value since February 2022 and the lowest year-over-year value since June 2021.

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