The S&P 500 stock market returned almost 25% in 2024, which was a back-to-back 20% plus annual market return; an event not seen since the late 1990s. The information technology sector, especially companies related to generative AI and 5G infrastructure, exploded in 2024. The information technology sector soared 36.6% for the year, communication services performed even better, rising 40.2%, as seen in Table 1. The bottom sector performers were Materials, Health Care, and Real Estate.
When it came to investing style, Growth outperformed Value by a wide margin. For example, the frequently discussed “Magnificent Seven” returns dwarfed the broader market in 2024, returning an average 65.6% for the seven mega-cap companies. This cohort was responsible for 53% of the S&P 500 Index’s total return in 2024, which left the remaining index constituents responsible for the other 47% of the Index’s annual return. Separately, as the election results became clear, individual stock performance dispersion widened, driven by posturing around the incoming administration. Health care, staples, and materials were impacted by speculation on the impact from a potentially changing regulatory landscape. Conversely the Financials sector was likely aided by the view that the Trump administration would be pro-business. In the end, Financials were the only value-oriented sector to beat the S&P 500 Index. 2024 ended on a sour note as the period from Christmas to the year end was the worst since 1952 as shown in Chart 1.
Dividend-paying equities also experienced wide performance dispersion in 2024. In fact, when it comes to dividends, investors needed to pivot, as the landscape has shifted dramatically. As shown in Table 2, the highest yielders were not the best route towards generating total return.
Table 2
Source: FactSet Research
As a category, returns for dividend payers were ultimately driven by company specific sentiment on the potential for future growth. In other words, as stock prices rose, corresponding dividend yields fell. As a cohort, lower yielders are more tilted towards the growth style while high yielders tilt towards the value style. From a portfolio perspective, incorporating dividend-payers across a wide range of yields could help capture both cyclical and defensive opportunities, which can collectively lead to a more balanced approach.
It is notable that the Less than 1% category significantly contributed more to total returns than all other dividend-paying categories combined. Given its outsized market capitalization weighting, Nvidia fell into this category and had a meaningful impact on returns in the broader universe as well. This single company contributed 550 basis points to the total return figure alone. The sentiment around generative AI, along with the company’s financial results during the year propelled shares into new heights. Relatively speaking, the Non-Payers category was more muted and contributed 670 basis points to the overall return. The higher yielding 2-3% and 3% Plus categories both saw average returns in the 14% range, well behind the broader group. As a collective category, the entire Dividend-Payer cohort returned 18.2%, which lagged the broader universe of equities.
The elephant in the room
While our strategy successfully navigated the dividend cut waters, significant cuts were found in prominent businesses that proved to be value traps. As seen in Table 3, six companies cut dividends, which ranged from Intel’s outright suspension to Estee Lauder’s 47% cut. These six companies averaged a negative -28.6% return. Shares of 3M rallied after they made their April dividend cut. 3M’s performance for the year showed that investors eventually applauded the move, which is why rigid rules-based portfolios have a challenging time with these dynamics. Typically, a dividend cut is a negative event for share prices and a strong signal for investors. On occasion a cut is viewed as addressing the “elephant in the room” and shares respond with relief. In the case of Intel, Walgreens and Celanese, the cyclicality of their businesses combined with their respective leverage ratios were the recipes for dividend cuts.
Table 3
Source: FactSet Research, public company filings
Outlook on the Economy and the Stock Market
The economy remained resilient in 2024 even with interest rates in restrictive territory. In addition, the labor market became more balanced, which also allowed for an orderly decline in interest rates. In 2025, the Federal Reserve is likely to be more cautious in lowering interest rates. Potential cross currents from new policies like tariffs and tax cuts may spur inflation. The current strong dollar may also indicate that interest rates may stay higher for longer. It is also important to recognize that the Republicans have a fragile majority in the House, which suggests that not all their policies will be enacted.
So, what does this economic backdrop mean for stock market returns in 2025? We expect more muted returns for the year, estimated in the 8%-10% range. Price-to-earnings ratios are currently stretched at 23x forward earnings but are also supported by 14% expected earnings growth for the year. Moreover, the earnings growth should broaden out from the Magnificent Seven.
Dividend Growth Scorecard
According to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, in 4Q 2024, the cumulative dollar value of U.S. common stock dividends per share posted an 9.7 % increase for the trailing twelve months1. Mr. Silverblatt also expects dividend growth rates to average 8% 2, which is an uptick from the average of 6% shown in 2024. As seen in Table 4, our strategy saw dividend increases across all eleven GICS sectors in 2024. For the year, thirty-four of our thirty-seven holdings (92%) announced dividend increases of 10.3% on average. All said, five holdings in our portfolio announced increased dividend payments in the final quarter with the fastest growers in Information Technology and Health Care.
Table 4
How is Brentview positioning our portfolios?
Brentview’s portfolio is currently balanced with both high and low yielding stocks. However, the overall portfolio yield remains higher than the S&P 500. We have slightly trimmed our technology weightings, due to company specific headwinds. The proceeds were redeployed into a financial sector company with a history of special dividends and an overall goal of returning more capital to shareholders. This position marks our third holding with a history of special dividends. After a lackluster 2024, we anticipate health care stocks will rebound. We remain cautious on consumer discretionary stocks as they are reliant on a background which includes stretched consumers and rising credit card charge offs.
Additionally, as the Trump Administration takes over, some financial elements of the Inflation Reduction Act (IRA) may come under further scrutiny and may be cut. While we believe the IRA cuts will be balanced, due to the IRA being a bipartisan enacted law, the effects could still be meaningful enough to warrant paying attention.
Sources
1 Press Release dated January 8, 2025, https://www.prnewswire.com/news-releases/sp-dow-jones-indices-reports-us-common-indicated-dividend-payments-increase-of-11-7-billion-in-q4-2024-as-dividend-growth-slows-302345344.html
2 Barron’s January 11, 2025, Dividends Will Keep Growing in 2025
This commentary reflects the views of Brentview Investment Management and is subject to change as market and other conditions warrant. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, sector, or index. The commentary should not be seen as a solicitation or offer to buy or sell any securities. The advisor (Brentview Investment Management, LLC), and their employees and clients, may hold or trade the securities mentioned in this commentary. Diversification does not guarantee a profit or eliminate the risk of a loss. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.
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