As we step into 2024, BofA Securities presents five compelling reasons to be optimistic about dividends. Notably, we made a similar prediction at the beginning of last year, foretelling that it would be a remarkable year for higher-dividend stocks after a lackluster performance in 2023, during which they trailed behind the S&P 500.
In November, we conducted a thorough screening of stocks in the S&P 500 in search of a yield of 7%. Our analysis led us to identify six companies that met this criterion: Altria, Walgreens Boots Alliance, Boston Properties, Healthpeak Properties, Verizon Communications, and KeyCorp.
Let us delve into the reasons fueling our optimism for dividends in 2024:
Reason 1: High Dividend Yield Stocks Lead in Recoveries
BofA Securities tracks a global macro indicator which points towards a “risk-on” recovery this year, dispelling fears of a downturn. In light of this, it is widely observed that stocks previously perceived as risky during recessionary or pre-recessionary periods tend to thrive and rebound from low expectations.
Savita Subramanian, Head of U.S. Equity and Quantitative Strategy at BofA Securities, explains, “Typically, all the stocks that were considered risky in a recessionary or pre-recessionary environment now have a lifeline from reduced credit and earnings risks. As a result, they are likely to outperform and defy initial pessimism.”
Reason 2: Dividend Stocks’ Resilience in Challenging Times
Another factor that supports our positive outlook on dividends is the fact that dividend stocks have historically weathered economic downturns and slower consumption periods. Subramanian emphasizes that even if consumption slows down and a full-fledged recovery is not attained, companies can safeguard their dividends by capitalizing on lower interest rates through borrowing.
“Distressed companies have been granted a temporary reprieve, as the cost of borrowing is expected to be lower rather than higher. They can capitalize on this advantageous situation to avoid dividend cuts in the near term,” states Subramanian.
Reason 3: High Dividend Stocks’ Performance During Rate Hikes
Drawing from past experiences, an encouraging third reason contributing to our bullish stance on dividends lies in the strong performance of high dividend stocks during the rate hikes witnessed in 2022. Should inflation become sticky and induce the Federal Reserve to increase interest rates several times this year, these stocks are well-positioned to fare significantly well.
In summary, with a promising macroeconomic outlook and favorable market conditions, 2024 holds great potential for dividends. High dividend yield stocks are expected to thrive, providing an opportunity for investors to capitalize on their resilience and growth prospects.
The Benefits of High Dividend Yield Stocks
High dividend yield stocks have always been an attractive investment option for many. Even in market downturns, these stocks can still provide a steady cash flow. Additionally, with the potential of further interest rate hikes by the Fed, high dividend yield stocks can prove to be a profitable investment.
History Shows Favorable Performance
In 2022, during a period of excessive inflation and the Fed increasing interest rates from 0% to 5%, high dividend yielding stocks performed surprisingly well. Despite the challenging economic environment, these stocks managed to hold their ground and deliver satisfactory returns.
Cash on the Sidelines
At present, there are trillions of dollars waiting on the sidelines in cash. As short-term interest rates are predicted to decline in the coming months, investors are likely to shift their funds from money-market funds and cash-like investments to equity income. This influx of capital into high dividend yield stocks can lead to further growth.
Attractive Valuations
One key factor attracting investors to high dividend yield stocks is their current attractive valuations. After underperforming in the previous year due to concerns over a potential credit crisis and recession, these stocks are now more reasonably priced. Investors who believed these companies would struggle and reduce their dividends have been proven wrong. As a result, these stocks have become relatively inexpensive compared to historical levels.
Diversified Investment Options
Investing in dividend payers offers numerous avenues for income-oriented investors. Broad mutual funds or exchange-traded funds (ETFs) are excellent choices for those seeking exposure to high dividend yield stocks. Morningstar recommends two well-regarded options: the Vanguard High Dividend Yield ETF for U.S. market exposure, and the Vanguard International Dividend Yield ETF for international and growth-oriented investors. Both of these funds have consistently provided higher yields than their respective markets, while also boasting low fees and well-diversified portfolios.
In conclusion, high dividend yield stocks present several advantages for investors. Not only do they offer a reliable and steady source of cash, but they have also demonstrated resilience during challenging economic periods. With attractive valuations and the potential for increased interest rates, these stocks are an appealing choice for income-oriented investors seeking reliable returns.
