High-dividend stocks are starting to outperform as low rates become the new norm again

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High-dividend stocks are starting to stand out as winners as bond yields continue to collapse.

Since late July, the S&P Dividend ETF, which bundles high-dividend stocks, has started to outperform the S&P 500 ETF Trust, which mimics the performance of the entire S&P. Since last week, the dividend ETF is down 0.7%, while the S&P ETF is down 1.1%.

“Driven by declining yields, high dividend yielding stocks have outperformed low dividend payers since late July,” Dennis DeBusschere, senior managing director at Evercore ISI, said in a note. “Even after the rebound, the relative performance of high vs. low dividend payers remains depressed, suggesting further upside for dividend payers as nominal bond yields remain extremely low yield.”

Uncertainty fueled by the U.S.-China trade war has caused interest rates to tumble.

Since the yield on the 10-year Treasury note fell to its lowest level in three years this week and the Federal Reserve cut interest rates for the first time since 2008, investors have been adjusting to a low-rate environment, that is likely to persist. The collapse in bond yields has sparked the slight outperformance and set the stage for some standout stocks that all have in common a high dividend payment to shareholders.

Individual stocks like Occidental Petroleum, with a 6.7% dividend, and pharmaceutical company AbbVie, with a 6.5% dividend, could be set to outperform, but there are also a variety of exchange-traded funds that lump a bunch of high-dividend stocks together that appear to be breaking out.

These are the top dividend-focused ETFs arranged by assets, according to ETF.com.

History shows it’s common that high-dividend stocks are favored in a low-rate environment as investors search for higher yields.

CNBC used Kensho, a hedge fund analytics tool, in June as the trade war was escalating and the yield on the 10-year Treasury note, a benchmark for mortgage rates and corporate borrowing, fell below 2%. The analysis found that communications was the top-performing sector in the Dow if you bought when the 10-year yield broke below 2% and then sold when it fell all the way to 1.5%.

The analysis, which looked at trading activity over the last two decades, found that Verizon, which has a dividend of 4.3%, is one of the best-performing Dow stocks under the same low-rate conditions.

— With reporting from CNBC’s Michael Bloom.

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