Tax-free dividends make Brazilian stocks attractive. But will the party end?

Brazilian investors are adjusting to a new reality since the beginning of the coronavirus pandemic. The unprecedented monetary response to the crisis saw benchmark interest rates slashed to just 2.25 percent a year, making variable income investments more attractive than ever. This created a near-immediate impact as Brazil’s stock exchange Ibovespa underwent a miraculous recovery after repeated crashes in March. But there is another factor that may make stocks even more engaging for financiers: dividends. 

In a report, XP Research analysts noticed that, for the first time in history, dividend yields paid by companies listed on the São Paulo stock exchange outpaced the profitability of Brazil’s benchmark interest rate. Therefore, beyond the prospect of making gains on stocks over time, investors would also receive more returns through dividends than with fixed-income assets.

“With dividend yields above the interest rates for some companies, investors have a ‘warranty’ of returns, besides the gains on the stocks performance,” wrote XP, adding that financiers are now looking at dividend performance in 2021, when profits are expected to return to normal levels.

Using 2019 as a yardstick, the perspectives are positive. According to Economática, 234 listed Brazilian companies paid a record of BRL 119.2 billion in dividends, 13 percent more than 2018 levels — and an amount that has been growing consistently for the past four years. The champions in dividend distribution were banks, oil and gas companies, and electricity firms.

Favorite sectors

XP analysts set aside electricity companies and banks as their preferred options. For the former, they believe that major players in the electric energy sector will be able to pay out...