Dividend-paying stocks barely performed last year as rates jumped to two-decade highs and investors flocked to bonds for high yields rather than volatile stocks for similar payouts. The S&P 500 Dividend Aristocrats index increased a meagre 5.7% in 2023 compared to the S&P 500's 26% gain.
However, Bank of America (BofA) believes that dividend-paying stocks are positioned to climb in the remainder of the year as investors start deploying the $6 trillion parked in high-interest money market funds. BofA strategist Savita Subramanian described the dividend trade as a "pain trade" because most investors are not well-positioned to benefit from the potential upside to dividend-paying stocks. "Over $6 trillion sits in US money market funds as the Fed is poised to start cutting rates," Subramanian noted this week. "Bond funds have seen record flows year-to-date, but we see more opportunities within equities for investors searching for yield."
BofA noted the presence of over 200 S&P 500 companies that offer higher real return potential vs. the 2% from the 10-year Treasury yield. It added that investors do not adequately own 75% of those stocks. "Overall, we expect dividends to make up a larger proportion of returns than the outsized price returns and multiple expansion of the past decade," Subramanian concluded.
BMO Capital Markets chief investment strategist Brian Belski also foresees huge gains from dividend stocks. "We believe these stocks have turned the corner, and recent relative strength is likely to persist in the coming months," Belski wrote recently. "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." His top dividend stock picks include Pfizer, Abbvie, Chevron, and Gilead Sciences.
Tech Stocks Transforming Dividing Investing
In January, Goldman Sachs opined that "investors are seeking durable, higher yielding dividends," expecting market volatility to continue throughout the" easing cycle." Meanwhile, Raymond James' chief investment officer, Larry Adam, also indicated that he prefers dividend stocks in tech and healthcare because they generally have a better growth component than traditionally defensive sectors such as utilities.
Generally, high-growth tech firms seldom pay dividends to investors. Instead, these companies reinvest in the business to fuel expansion. However, this year, mega-cap tech companies like Alphabet, Meta, and Salesforce CRM announced their first dividend payouts. Although yields from tech firms are relatively low, the potential to grow payouts and earnings is a combination that appeals to many engaged in dividend investing.
As large-cap tech stocks issue dividends, income strategies now "have access and exposure to those names that have driven the market more recently," according to Matt Quinlan, lead portfolio manager for Franklin Equity Income fund and the Franklin Rising Dividends fund. Meanwhile, Tom Huber, portfolio manager for the T. Rowe Price Dividend Growth fund, thinks there will be "more opportunities for dividend growth investors to buy" tech stocks.
Furthermore, the gradual rebound of dividend stocks and rising optimism of a September rate cut by the US Federal Reserve are also driving more investors in search of higher yields towards dividend stocks.
Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.
