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 ahead of potential dividend cuts.
Here are some of the names that made the bank's list for August. One of the financial firms that made the cut is PNC Financial Services , which yields 3.69% and is up 12% so far this year.
Bank of America analyst Ebrahim Poonawala upgraded the stock last week to buy from neutral, calling it an "all-weather stock." He also raised his price target to $200 from $185, suggesting about 15% upside from Tuesday's close. "PNC belongs to the small group of 'sleep at night' stocks," Poonawala said, pointing to its expected 14% annual earnings growth estimates and 15% rate of return on the stock's tangible common equity.
"Rapid rate-cuts that could weigh on EPS outlooks of asset sensitive peers (including certain money center banks), could drive a further rotation into the stock." Information technology giant IBM also made the list. The company posted an earnings and revenue beat for its second quarter last month, noting that its generative artificial intelligence business is growing.
It also expects free cash flow to come in above $12 billion. The stock is up nearly 20% so far this year and has a dividend yield of 3.41%.
Meanwhile, utilities play PPL yields 3.27% and has gained 16% year to date. Generally, utilities are known for their predictable dividends.
The stocks are also seeing a boost due to anticipated demand for electricity to power AI data centers. The S & P 500 utilities sector is up about 18% year to date. In contrast, the real estate sector is the worst performing of the S & P so far this year, up just 4.
8%. Yet, Ventas , a real estate investment trust with a 3.05% dividend yield, has gained 18%.
The company, whose portfolio includes senior housing communities, is expected to benefit from the aging population . The last of the baby boomers will turn 65 in 2030, according to the U.S.
Census Bureau..
