After a decade of lagging performance, dividends are expected to make a comeback in the market. Bank of America anticipates that the contribution of dividends to total market returns will be significantly higher in the coming years. Equity and quant strategist Savita Subramanian notes that dividend stocks have underperformed, with the Schwab U.S. Dividend Equity ETF returning only 8% year to date, compared to the S & P 500’s 17% gain. As the Federal Reserve gears up to decrease rates and bond yields decline, investors are likely to turn to dividend-paying stocks.
Bank of America advises investors to be cautious when seeking out high-yield stocks. Subramanian emphasizes the importance of focusing on dividend-paying stocks with above-market yields that are secure and not overly stretched. To identify potential stocks, Subramanian screened the Russell 1000 and divided it into quintiles based on trailing dividend yield. She recommends targeting stocks from the second-highest tranche to avoid distressed companies that may move into the highest dividend yield group if prices drop.
Among the stocks highlighted by Bank of America for August is PNC Financial Services, which currently yields 3.69% and has seen a 12% increase in value year to date. Analyst Ebrahim Poonawala recently upgraded the stock to buy from neutral, citing its stable performance and growth potential. Information technology giant IBM is also on the list, boasting an impressive dividend yield of 3.41% and a significant uptick in stock price so far this year. Another notable mention is utilities company PPL, which offers a 3.27% dividend yield and has gained 16% year to date.
While utilities have seen positive growth this year, the real estate sector has struggled, with the S & P real estate sector up only 4.8% year to date. However, real estate investment trust Ventas has defied expectations with an 18% gain and a 3.05% dividend yield. With a portfolio that includes senior housing communities, Ventas is poised to benefit from the aging population, as the last of the baby boomers are set to turn 65 in 2030 according to the U.S. Census Bureau.
While dividends are expected to play a more significant role in market returns in the coming years, investors must exercise caution and focus on quality over yield. By carefully selecting dividend-paying stocks that offer stability and growth potential, investors can position themselves for long-term success in an ever-changing market landscape.