The Federal Reserve’s anticipated lower rates may prompt investors to reconsider dividend-paying stocks as an alternative source of income, suggests Citi Research. Reduced interest rates could diminish the attractiveness of fixed income investments, encouraging investors to seek companies with reliable dividend payments. Scott Chronert, Citi Research’s head of U.S. equity strategy, believes that the Fed’s shift towards a less restrictive rate policy will lead investors to diversify their income sources, including dividends.
Higher rates and the market’s performance in 2022 have led many investors to prioritize companies with capital expenditures that result in near-term cash flows. However, this trend is shifting as investors recognize the appeal of dividend payouts. Companies are responding by initiating or increasing dividend payments, with 13 initiating and 323 increasing their payouts in the past year.
In a low-interest rate environment, dividend-paying companies can provide investors with a steady stream of income. Citi Research has identified several stocks in the S&P 500 with the potential to increase their dividend payouts this year, based on criteria such as a buy rating from Citi Research, a 3-year dividend per share with a compound annual growth rate above 5%, and a reasonable payout ratio.
Among the identified stocks are Visa, Mastercard, and Lam Research. Visa, with a current dividend yield of 0.7%, has a buy rating from most analysts and an average price target suggesting a 13% upside. Mastercard, with a dividend yield of 0.6%, is also highly regarded by analysts, who predict a 12% upside. Lam Research, with a dividend yield of 0.9%, has been upgraded to a buy rating due to its revenue growth potential, and its stock has increased by nearly 19% this year.
It’s important to note that while dividend-paying stocks offer income potential, investors should carefully consider factors such as the company’s financial health, dividend growth potential, and overall investment strategy before making investment decisions.
