The expectation for dividends to play a larger role in market returns is gaining traction, with Bank of America predicting a significant increase in dividend contributions compared to the previous decade. Equity and quant strategist Savita Subramanian emphasized the importance of dividend-paying stocks, especially as the Federal Reserve adjusts rates and bond yields begin to decline.
Despite the market’s recent performance, dividend stocks have not fared as well as other sectors, with the Schwab U.S. Dividend Equity ETF only returning 8% year to date, in contrast to the S & P 500’s 17% gain. Investors are expected to pivot towards dividend-paying stocks as a response to the Federal Reserve’s rate adjustments.
Subramanian highlights the significance of investing in dividend stocks with above-market yields that are secure and not stretched. By screening the Russell 1000 and categorizing it into quintiles based on trailing dividend yield, investors can identify potential opportunities for profitable investments while mitigating risks associated with distressed companies.
Bank of America’s list of recommended stocks for August includes PNC Financial Services, a financial firm with a 3.69% yield and 12% year-to-date gain. Analyst Ebrahim Poonawala upgraded the stock to buy status, emphasizing its stable performance and growth potential in the current market environment. Additionally, IBM, with its strong performance in the second quarter and promising outlook for its artificial intelligence business, is another notable inclusion in the list.
While the utilities sector, exemplified by PPL, has shown robust performance with a 3.27% yield and 16% year-to-date gain, the real estate sector has been lagging behind. Ventas, a real estate investment trust focusing on senior housing communities, stands out as an exception with an 18% gain and a 3.05% dividend yield. The company is poised to benefit from the aging population trend, with the last of the baby boomers turning 65 in 2030.
The resurgence of dividends as a significant contributor to market returns presents both opportunities and risks for investors. While the prospect of higher dividend contributions is promising, careful selection and due diligence are essential to navigate the evolving market landscape effectively. By heeding advice from experts like Bank of America, investors can position themselves strategically to capitalize on the potential benefits of dividend-paying stocks while safeguarding their portfolios against potential pitfalls.