Dividend-paying stocks are set to become the focal point for investors in the latter half of the year, driven by the anticipated deployment of a significant portion of the $6 trillion currently parked in money market funds, according to Bank of America.
Savita Subramanian, a leading strategist at Bank of America, referred to the dividend trade as a “pain trade,” implying that most investors are not adequately positioned to capitalize on the potential upswing in dividend-paying stocks.
“Over $6 trillion sits in US money market funds as the Fed is poised to start cutting rates,” Subramanian stated in a recent note. “Bond funds have seen record inflows year-to-date, but we see more opportunities within equities for investors searching for yield.”
The note highlighted that over 200 S&P 500 stocks offer higher real return potential than the 2% yield of the 10-year Treasury. Notably, approximately 75% of these stocks are under-owned by professional investors, presenting a substantial opportunity for growth.
Among the highest-yielding S&P 500 companies are Walgreens Boots Alliance, Altria, Verizon, Ford, and AT&T. Although the S&P 500’s overall dividend yield is around 1.25%, nearly 300 stocks within the index offer higher yields, showcasing the breadth of opportunities available.
Subramanian emphasized the potential shift in return dynamics, stating, “Overall, we expect dividends to make up a larger proportion of returns than the outsized price returns and multiple expansions of the past decade.”
Brian Belski of BMO shares a similar optimistic outlook on dividend-paying stocks. He anticipates significant gains, particularly following their underperformance since the stock market bottom in October 2022.
“We believe these stocks have turned the corner, and recent relative strength is likely to persist in the coming months,” Belski noted. “With the Fed now likely to cut rates sooner than previously anticipated, the likely drop in longer-term yields in response should provide a boost.” Belski recommends high-yield dividend stocks such as Abbvie, Chevron, Duke Energy, Gilead Sciences, and Pfizer.
As investors continue their search for yield in an environment where interest rates are expected to decline, dividend-paying stocks may emerge as the overlooked segment of the stock market primed for growth.
The Federal Reserve is anticipated to make its first interest rate cut of the current cycle at the September FOMC meeting, setting the stage for a favorable environment for dividend-paying stocks.
Key Takeaways:
- Bank of America identifies a significant opportunity in dividend-paying stocks, driven by $6 trillion in money market funds.
- Savita Subramanian highlights the “pain trade” in dividend stocks, suggesting many investors are under-positioned.
- Over 200 S&P 500 stocks offer higher real return potential than the 2% 10-year Treasury yield.
- High-yield stocks such as Walgreens Boots Alliance, Altria, Verizon, Ford, and AT&T present attractive options.
- BMO’s Brian Belski forecasts strong performance for dividend stocks amid anticipated Fed rate cuts.
Conclusion
As the Federal Reserve prepares for potential rate cuts, dividend-paying stocks stand out as a lucrative opportunity for yield-seeking investors. With substantial cash reserves ready for deployment and a broad array of high-yield options within the S&P 500, investors positioned in dividend stocks could see significant gains in the coming months. The market’s focus is poised to shift towards these undervalued assets, marking a potential resurgence in their performance.
