As the Federal Reserve starts to cut interest rates, it makes sense that investors might turn to dividend stocks. After all, dividend payers should benefit as lower bond yields offer less competition. In addition, they can be a defensive play if the economy falls into a recession.
However, the reality is more nuanced, according to Ned Davis Research. What can make the difference between those that outperform and those that do not is how aggressively the Fed slashes rates, Ed Clissold, the firm's chief U.S.
strategist, said in a July 31 note. The macro team at Ned Davis Research is expecting the central bank to lower rates at a slow pace of three or four cuts over the next year. In slow tightening cycles, fast dividend growers have outperformed slow growers and high yielders, the firm found in its analysis.
The fastest growers are defined as the top 25% of the S & P 500 payers by trailing one-year dividend growth, while the slowest are the bottom 25%. The fastest growers have outperformed the slowest growers during the first year of easing cycles, but their "strongest and most persistent relative strength" has occurred during the first six months, Clissold explained. "In a slow cycle, economic growth remains positive but generally is moderating and in that environment investors tend to put a premium on growth of all kinds — earnings growth, sales growth but also dividend growth," he said in an interview with CNBC.
"Companies that can still grow their dividend in that environment are signaling to the market that their cash flows and balance sheets are in good shape," he added. "People looking for income, that is the better place to focus." In contrast, high-yielding stocks have outperformed when the economy is going into a recession as investors get defensive, Clissold explained.
To come up with a list of stocks, CNBC Pro screened for names with the fastest-growing yield that are also loved by Wall Street. We looked within the top 25% of S & P 500 dividend stocks by trailing one-year dividend growth. The stocks have a quarterly dividend growth of 10% or more in the past year and buy ratings from at least 55% of the analysts covering the stocks, per FactSet.
They also have a dividend yield of more than 2% and an upside of 10% or more to the average price target. Three real estate investment trusts made the list: Host Hotels & Resorts , Equinix and Prologis . Real estate is one of the worst-performing sectors of the S & P 500, up just more than 3% year to date.
In contrast, the broader index has gained 12%. Host Hotels & Resorts owns luxury and upper-upscale hotels and has a dividend yield around 5%. Shares have nearly 30% upside to the average analyst price target, according to FactSet.
The stock has shed 17% year to date. Meanwhile, Equinix, a diversified data center landlord, is seen by many as a beneficiary of artificial intelligence as demand continues to surge for data centers. The stock yields about 2% and has 11% upside to the average analyst price target, according to FactSet.
Shares are up more than 1% year to date. Prologis, which owns industrial properties, yields around 3% and has 13% upside to the average analyst price target, per FactSet. Shares tumbled in April after Prologis cut its full-year guidance, dragging the rest of the industrial REIT industry down with it.
However, the company raised its full-year forecast in July. Shares are down 10% so far this year. PLD YTD mountain Prologis year to date Two energy names made the cut, including SLB .
The stock pays a 2.5% dividend yield and has nearly 50% upside to the average analyst price target. The oilfield services giant posted an earnings and revenue beat for its second quarter in July.
In March, SLB said it was investing nearly $400 million in Norway's Aker Carbon Capture. The move is part of its growing focus on lower-carbon technologies. Lastly, Mondelez yields 2.
7% and has 15% upside to the average price target. The snack company reported adjusted earnings per share for the second quarter that topped expectations, but its revenue fell short. The stock is down about 4% year to date.
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