2024 could be a banner year for dividends, and BofA Securities sees five reasons to be bullish.
It is worth noting Barron’s made a similar call at the turn of the year, writing it could be an excellent year for higher-dividend stocks after a mediocre 2023, when they lagged behind the S&P 500.
And in November, we screened stocks for a yield of 7% in the S&P 500 and came up with a half dozen companies:
Altria,
Walgreens Boots Alliance,
Boston Properties,
Healthpeak Properties,
Verizon Communications,
and
KeyCorp.
BofA said the first reason to be optimistic about dividends this year is that high dividend yield stocks tend to lead in recoveries. According to a global macro indicator that BofA tracks, the markets are headed for a “risk-on” recovery this year, not a much-feared downturn.
“Typically what happens is that all the stocks that were considered risky in a recessionary or pre-recessionary environment now have a lifeline from less credit and earnings risk and tend to outperform and bounce back from the dire expectation levels,” Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities, told Barron’s.
A second reason is that dividend stocks should do well even if consumption slows and there isn’t a full-fledged recovery. Subramanian said that if the Federal Reserve cuts rates, or is done hiking, companies can preserve their dividends by borrowing at lower interest rates.
“Those distressed companies have now been given a little bit of a stay of execution, because the cost to borrow is likely to be lower rather than higher, and they can take advantage of that to just stave off dividend cuts in the near term,” Subramanian argued.
If inflation proves to be sticky and the Fed hikes interest rates a few more times this year, high dividend stocks should still fare well, based on their strong performance in 2022 when rates soared. That is reason No. 3.
“Even if the market goes down, you still get cash,” said Subramanian. “And if the Fed hikes a couple more times, we think that high dividend yield can actually do OK.”
That is because in 2022, when we had an environment where the Fed hiked from 0% to 5% and inflation was out of control, high dividend yielding stocks fared reasonably well.
The fourth reason is that trillions of dollars are sitting on the sidelines in cash, and if short-rates fall—as they are expected to do in the coming months—investors will likely move money out of money-market funds and cash-like investments into equity income.
The final reason is that dividend yield underperformed last year and now valuations are attractive.
The high dividend yielding areas such as real estate investment trusts, financials, energy, utilities, and some consumer staples generally underperformed in 2022 because investors were bracing for a massive credit crisis in a recession.
“They thought these companies wouldn’t be able to survive and maintain their dividends,” Subramanian said. “Dividend cuts are anathema for income-oriented investors, so these stocks dropped and they’re now relatively inexpensive today versus history.”
The good news for income investors is that there are a lot of ways to invest in dividend payers, including broad mutual funds or exchange-traded funds.
According to Morningstar, two all-round great choices to start with are
Vanguard High Dividend Yield ETF
and
Vanguard International Dividend Yield ETF,
which sit in the U.S. and international/growth and income cohorts, respectively.
“Both have low fees and well-diversified portfolios that have consistently delivered a reasonably higher yield than their respective market,” analysts wrote recently.
Write to Lauren Foster at [email protected]
Read the full article here