During the Federal Reserve's interest rate cut cycle, high dividend stocks may also be one of the categories that attract investors' attention.

This article discusses how to invest in high dividend stocks under the expectation of interest rate cuts.

Could dividend stocks benefit from the Federal Reserve's interest rate cuts?

According to a report by Morningstar, during interest rate cuts, dividend-paying stocks generally perform better than non-dividend stocks. The potential reasons may include the following two:

1. One reason is that lower interest rates may increase the attractiveness of dividend stocks, as some investors rely on dividends as their primary source of investment income.

2. Another reason is that stocks tend to perform relatively well before economic recessions, and economic recessions often occur simultaneously with interest rate cuts.

How to select high dividend stocks?

With so many high dividend stocks in the market, how should one choose?

According to a research report by Columbia Threadneedle Investments, historically, when the Federal Reserve begins to lower interest rates, companies that increase dividends tend to perform better than other stocks.

Thus, when selecting high dividend stocks, the reliability of dividends and the growth of dividends are important considerations.

In the US stock market, there are two lists that specifically track companies that continuously increase dividends, namely: Dividend Aristocrats and Dividend Kings.

Dividend Aristocrats primarily track companies that have increased dividends for 25 consecutive years, while Dividend Kings track companies that have increased dividends for 50 consecutive years.

Generally speaking, it is rare for companies to maintain and increase dividends over long periods of time because their business must be very stable, and their products or services are usually not affected by economic downturns to have the opportunity to continue increasing dividend distributions.

Therefore, Dividend Aristocrats and Dividend Kings are usually blue-chip stocks in various industries. These companies have mature business models capable of generating stable profits and cash flows, and they are generally willing to return profits to shareholders in the form of dividends.

2024 Dividend Aristocrats List (ranked by dividend yield)

Becoming a Dividend Aristocrat is not easy; there are strict selection criteria:

• First, it must be a component of the S&P 500.

• It must have raised dividends for at least 25 consecutive years.

• Market cap must exceed 3 billion dollars.

• The average daily trading volume over the past 3 months must be at least 5 million dollars.

According to Simply Safe Dividends, there are a total of 67 companies selected as Dividend Aristocrats for 2024, including well-known names to investors like Coca-Cola (KO), McDonald's (MCD), and Walmart (WMT), which are typical representatives of Dividend Aristocrats.

Investors can also filter some noteworthy Dividend Aristocrats based on different indicators, one commonly used indicator being the dividend yield.

Since the company's stock price fluctuates constantly while the company's dividends remain relatively stable, the dividend yields of the stocks within dividend aristocrats will vary at different points in time.

As of June 25, 2024, according to the latest dividend yield rankings, investors can find the top 10 dividend aristocrats. Among them, the top three dividend aristocrats are Realty Income (O), Franklin Resources (BEN), and Amcor (AMCR), with dividend yields of 5.96%, 5.43%, and 5.06% respectively.

2024 Dividend King List (ranked by dividend yield)

Unlike dividend aristocrats, dividend kings are not required to be components of the S&P 500 Index, but the standards for dividend growth are stricter. Dividend kings must meet the condition of having increased dividends for at least 50 consecutive years.

Therefore, the list of dividend kings may overlap with that of dividend aristocrats but will have more high-quality income stocks outside of the S&P 500 Index.

According to data from Simply Safe Dividends, a total of 53 companies made it to the dividend king list in 2024, among which the three companies with the longest consecutive dividend increases are American States Water (AWR), Northwest Natural (NWN), and Dover (DOV), all of which have raised dividends for at least 68 consecutive years.

Investors can also filter the lists using dividend yield indicators. As of June 21, 2024, the top ten dividend kings by dividend yield are shown in the figure, among which the top two are two tobacco companies Altria (MO) and Universal Corp (UVV) with dividend yields of 8.44% and 6.73% respectively.

How to invest in high-yield stocks?

For investors seeking stable cash flow, the lists of Dividend Aristocrats and Dividend Kings provide some good options.

Investors can select their favorite income stocks from the lists using various indicators, such as dividend yield, but the risk of investing in individual stocks may be higher.

Of course, investors can diversify their risk by investing in related ETFs instead of just one or two stocks.

Currently, there are ETFs specifically tracking Dividend Aristocrats in the market, but there are no ETFs specifically tracking Dividend Kings as of now.

According to the official website of S&P Dow Jones Index, there are currently two ETFs in the U.S. market tracking Dividend Aristocrats: Proshares Trust S&P 500 Divid Aristocrats Etf (NOBL) and FT Cboe Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG).

Pros and cons of investing in income stocks:

Advantages:

• Stable cash flow: Dividend Aristocrats and Dividend Kings can provide investors with stable dividend cash flow regardless of whether the stock market is down or during periods of economic recession.

• Strong financial strength: Dividend aristocrats and dividend kings have sustained the practice of increasing dividends annually for at least 25 years. This indicates that they can maintain financial stability even under the harshest macroeconomic conditions. This is a good sign that these companies can withstand the storms of the market.

Disadvantages:

• Low growth: Dividend aristocrats and dividend kings are often established companies, thus their growth potential is limited. This means they may not be able to offer high growth opportunities like emerging companies.

• Risk of dividend cuts: Not all companies on the lists of dividend aristocrats and dividend kings can continue to increase their dividends in the future. When a company’s operating conditions worsen and profits decline, there is a risk of dividend cuts, which could lead to being removed from the list.

• Dividends are subject to taxation: Even if you plan to hold stocks long-term to avoid paying capital gains tax, the annual dividend payments are still taxable. This may impact your overall investment return, so tax considerations need to be taken into account in investment decisions.

In summary, high dividend stocks provide a good option for investors seeking reliable dividend income, but there are also some limitations. Investors need to weigh these pros and cons to ensure alignment with personal investment goals and risk tolerance.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.