Dividends are poised for a comeback, but investors should be careful not to stretch for yield, according to Bank of America. The bank is expecting the contribution of dividends to total market returns to be "significantly higher" than it was in the last decade, equity and quant strategist Savita Subramanian wrote in a note Friday. Dividend stocks have lagged the market, with the Schwab U.
S. Dividend Equity ETF returning 8% year to date, compared to the S & P 500 's 17% gain so far this year. Investors are likely to turn to dividend-paying stocks as the Federal Reserve starts to decrease rates and bond yields begin to decline.
Bank of America believes the central bank will achieve a soft landin g as it shifts its policy. "What we are seeing is a reasonably healthy economy. It is slowing.
The Fed has controlled inflation. We are now at a point where the Fed can begin to cut rates and that is actually good news for stocks," Subramanian said in an interview with CNBC's "Squawk on the Street" last week. The market is expecting rate cuts to begin in September.
Subramanian suggests investors looking to buy dividend stocks focus on those with above-market yields that are secure and not stretched. To find those names, she screened the Russell 1000 and split it into quintiles by trailing dividend yield. She highlighted the second-highest tranche, which guards against owning distressed companies that might move into the first quintile, the highest dividend yield group, if prices fall ah.