Stock dividends are anything but boring — they’re responsible for 36% of the S&P 500’s SPX total return since 1927 assuming reinvestment. That will be meaningful if U.S. bond yields fall from here. Declining interest rates boost the shares of dividend-paying stocks, because falling rates make their yields even more attractive.
You get a double-win — dividends and stock appreciation — if interest rates decline. Bank of America analysts have proclaimed 2024 the “year of the dividend.”
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Declines in interest rates will push down money-market fund yields. When money-market rates fall below 5%, which is likely, households move cash to stocks from money-market funds, Bank of America says. Many of them will be shopping for dividend yield.
Stocks to consider
John Buckingham, editor of the Prudent Speculator stock newsletter, singles out three promising dividend payers to consider now. They should be held as part of a broadly diversified portfolio, to reduce single-stock risk.
1. Bristol-Myers Squibb: Shares of big pharmaceutical companies have been weak on concerns about patent expirations, U.S. government price controls, and higher interest rates that reduce the value of future earnings in valuation models.
A good example is Bristol-Myers Squibb BMY. Buckingham, a value investor, says the stock is attractive. A big reported loss in April hurt the shares, but most of that was due to one-time accounting write-offs linked to acquisitions, Buckingham said. Bristol-Myers Squibb most recently posted 6% sales growth, which isn’t bad for such a huge company.
2. Cisco Systems: Cisco Systems CSCO, the holdover networking equipment provider from the late 1990s tech bubble, wants you to believe it is an AI play. That’s because it recently purchased Splunk, a software company that collects and analyzes machine-generated data. Cisco paid a high price, but it might be worth it if the purchase helps Cisco “power and protect the AI revolution,” as the company likes to say.
Buckingham likes the product lineup in network switching devices. Cisco’s p/e is well below the medium-term average, suggesting stock gains from here as valuation normalizes.
3. Civitas Resources: This Buckingham suggestion is not trading close to 52-week lows. Civitas Resources CIVI stock is up so far this year in part because the energy producer beat on sales and earnings in the first quarter.
The shares recently yielded 2.7%. But that ignores a variable dividend of $1 per quarter, which pushes up the actual yield to about 8%. Of course, “variable” means just that. The $1 per quarter payout could go away.
The stock trades at a single-digit multiple to earnings and the company has been aggressively buying back stock, with plenty of room left in its buyback plan for this year.
Dividend growth stocks
Companies with the confidence to raise dividends tend to be profitable and financially healthy. These are qualities investors favor during economic slowdowns. Morningstar analyst Susan Dziubinski likes Bristol-Myers Squibb for that reason. Here are two other stocks she favors:
1. Nike: Because of soft sportswear demand, Nike NKE stock is down from highs of around $123 in December. But Nike should stage a comeback. It has a powerful brand which supports the wide moat around its business, according to Morningstar. The company dominates athletic footwear in all major categories in all the big markets.
So, the odds are that Nike will find its footing thanks to ongoing innovation, marketing and supply chain improvements. “Nike will regain lost share and outpace market growth when sportswear demand improves,” Dziubinski says. Using net present value models, Morningstar thinks the shares are worth $129 instead of the current price of $92.
2. Gilead Sciences: Gilead Sciences GILD is a biopharma giant that trades near 52-week lows. But the company’s stock should get a boost from solid study results from its pipeline of oncology drugs, plus acquisitions. Its strong balance sheet implies a significant margin of safety.
Based on net present value model estimates, Morningstar thinks the stock should be trading at $97, instead of the recent price of $64.
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