Potential for Strong Dividends in 2024
As we look ahead to the year 2024, BofA Securities highlights five compelling reasons to be optimistic about dividend stocks. This sentiment echoes a similar outlook expressed at the beginning of the year, which anticipated a prosperous year for higher-dividend stocks following a lackluster performance in 2023 compared to the S&P 500.
In November, we conducted a screening of stocks within the S&P 500 and identified six companies with an impressive yield of 7%: Altria, Walgreens Boots Alliance, Boston Properties, Healthpeak Properties, Verizon Communications, and KeyCorp.
BofA Securities asserts that the first reason for this positive outlook on dividends lies in the fact that high dividend yield stocks often lead during recoveries. Based on a macroeconomic indicator tracked by BofA, the markets are poised for a "risk-on" recovery rather than the feared downturn. Given this outlook, stocks that were previously considered risky in a recessionary environment now have the opportunity to outperform and bounce back from the low expectations set for them.
The second reason supporting the optimism towards dividend stocks is that they can still perform well even in the face of slowed consumption and an incomplete recovery. Even if the Federal Reserve decides to cut rates or halt any increases, companies can maintain their dividends by borrowing at lower interest rates. This provides distressed companies with some breathing room, allowing them to postpone dividend cuts in the near future.
Moreover, if inflation remains persistent and the Fed decides to raise interest rates multiple times throughout the year, high dividend yield stocks are still expected to perform strongly based on their impressive performance in 2022 when rates skyrocketed. This serves as reason number three for our optimism.
With all these factors in mind, 2024 holds tremendous potential for investors looking to capitalize on strong dividends.
Finding Opportunity in High Dividend Yield Stocks
Even in a market downturn, there is still potential to generate cash through high dividend yielding stocks. According to Subramanian, if the Federal Reserve continues to increase interest rates, these stocks can still perform well.
In fact, during 2022, when the Fed raised rates from 0% to 5% and inflation became difficult to control, high dividend yielding stocks proved to be a reliable investment.
One compelling reason to consider these stocks now is the vast amount of cash currently sitting on the sidelines. As short-term interest rates are expected to decline in the coming months, investors are likely to move their funds from money-market and cash-like investments into equity income opportunities.
Another factor contributing to the appeal of high dividend yield stocks is their underperformance in the previous year, leading to attractive valuations in the present. Sectors such as real estate investment trusts, financials, energy, utilities, and certain consumer staples experienced lower yields in 2022 due to concerns about a credit crisis and recession. However, this skepticism has created opportunities for income-oriented investors, as these stocks are now relatively inexpensive compared to their historical prices.
For those interested in investing in dividend payers, there are various avenues to explore. Broad mutual funds or exchange-traded funds (ETFs) provide diversified options. Among them, Vanguard High Dividend Yield ETF and Vanguard International Dividend Yield ETF are highly recommended choices by Morningstar. These funds have consistently delivered above-average yields compared to their respective markets and come with the added benefits of low fees and well-diversified portfolios.
In summary, high dividend yield stocks offer the potential for consistent cash flow even in turbulent market conditions. With the expectation of declining interest rates and attractive valuations, now may be an opportune time for income-oriented investors to consider these stocks as part of their investment strategy.
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