Higher interest rates boost dividends; see care – 09/29/2024 – Market

Investors have increased their bets on shares of companies considered “good dividend payers” in one of the market movements that reflect the rise in interest rates in Brazil.

Those who do not want to go completely into fixed income tend to look for shares in more consolidated companies and safer sectors. Proof of this is the performance of IDIV, B3’s dividend index, which rises more than 7% in the year, while Ibovespa accumulates an increase of 1.82%. But for experts, caution is needed.

This movement is known in the market as “fly to quality”. “It is a search for more predictable and secure assets in terms of results and carry, which are characteristics that dividend companies usually deliver. They have more mature operations and, in some cases, their businesses are more ‘shielded'”, says analyst Bernardo Viero, dividend specialist at Suno Research.

Good dividend-paying companies usually distribute money to shareholders because they are not expanding. The profit enters the cash register and, due to the lack of “a place to spend it”, later becomes income. These companies have lower “carrying costs”, as mentioned by the expert, since they do not take as much risk (with less volatile shares) and because of the greater return to the shareholder.

The same does not happen with companies that are looking to grow, which tend to reinvest the majority of their earnings. Not infrequently, they also suffer from lower cash generation at a time such as rising interest rates due to being more indebted (as they tend to take more credit to finance expansion).

Other than that, as mentioned by Viero, good dividend payers also tend to be in more stable sectors. “These are resilient sectors. With or without a crisis, people will continue to use water, turn on the lights and use the banks”, adds Carol Stange, financial planner and educator.

Among the 20 largest dividend payers in 2024, when taking dividend yield into account (value of dividends over share price), most of the names are in the financial or utilities sectors, with 11 representatives. Commodity companies are also highlighted, with seven names.

Petrobras, with two different shares, occupies the top positions, followed by Cemig and Auren, both from the energy sector.

Care when investing with dividends in mind

But anyone interested in starting to contribute with an eye on the earnings should take some care. Experts point out that one of the most common mistakes made by new dividend investors is precisely looking to the past in search of high dividend yields.

“Choosing a company because of its dividend yield is the worst thing an investor can do. The return that the company has had in the past is not always sustainable”, says Stange. “Sometimes a company pays a high dividend at a given time for an isolated, one-off event. Sale of assets or equity, for example. After this period, it returns to ‘normal.'”

Ruy Hungary, analyst responsible for Empiricus’ dividend portfolio, mentions the case of Vivo, for example. The company, in the past, was known for being a good dividend payer, but in recent years it has leveraged itself to acquire part of Oi and to invest in optical fiber — and now has leaner profits.

“Sometimes a company that historically pays dividends attracts a lot of people who have no idea whether it will actually be able to continue paying. These are people who only look at the past, without doing in-depth analysis. When they suddenly realize that the dividends are not will leave, sell the shares and generate strong falls”, says the expert.

Felipe Pontes, director of wealth management at Avantgarde and writer of the book “The Dividend Stock Investor”, explains that it is necessary to monitor, more than the sector, the moment in which the company finds itself. “It is also necessary to evaluate how the company is performing. A normal trick for new investors is that some shares have high yields because the price of the paper, which is the divisor in the calculation, has fallen”, he adds.

Einar Rivero, CEO of Ayta Consultoria, finally points out that buying dividend shares is not always enough to see your assets grow.

“If you earn dividends, spend and the share falls, you are actually destroying capital. The proceeds, it’s worth remembering, come out of the share price”, he mentions, stating that the cash distribution is deducted from the price of the paper. “Are dividends a good thing? Yes, but you also need to have strategies.”