By Ian Salisbury

Dividend investors have reason to cheer interest rate cuts. They make payouts more attractive relative to bond yields -- and dividend aristocrats including Walmart, Johnson & Johnson, and AbbVie are set to benefit the most.

With inflation coming under control, the Federal Reserve has cut the benchmark federal-funds rate by three-quarters of a percentage point since September. Wall Street traders see a 64% chance of another rate cut at the Fed's next meeting later this month.

With Treasury yields coming down, more income-hungry investors could turn their attention to dividends, according to a new report by Wolfe Research.

"With the Fed in the midst of a cutting cycle, we expect income-oriented themes to become increasingly attractive relative to Treasury yields over the next twelve months," wrote Chief Investment Strategist Chris Senyek on Monday.

Wolfe also argued that focusing on so-called dividend aristocrats, companies that have 25-year records of making and raising dividends, was likely to beat other dividend-oriented strategies in the coming months.

Historically, dividend aristocrats posted a median return of 7.6% in the 12 months following the first interest-rate cut in a Fed rate cutting cycle, according to Wolfe, which looked at returns over the past five cycles going back to 1995. Those results handily beat other popular dividend strategies, such as focusing on companies with the highest rates of dividend growth (a median return of 1.8%) or the highest yields (-1.8%).

To put that in a broader context, the S&P 500 has returned 4.1% on average in the 12 months following onset of the past five rate-cutting cycles, according to separate research from Morningstar and Ned Davis.

Investors looking to own longtime dividend payers can use a fund like the $13 billion ProShares S&P 500 Dividend Aristocrats ETF. A big tilt toward materials and defensive consumer stocks and away from the technology and communications sectors means the fund has lagged behind the S&P 500 this year, returning 16% compared with 28% for the broader market.

But the fund has its advantages. It is cheap relative to the rest of the market, with a portfolio that trades at about 19 times earnings, compared with 21 times for the S&P 500 as a whole. The ETF also boasts a more generous yield: 2% compared with just 1.2% for the broad market.

For investors hunting for individual stocks, Wolfe says it found a handful that qualify as dividend aristocrats and pass its "double beats" stock screen -- meaning they have beat Wall Street analyst revenue and earning per share estimates for the past two quarters and have seen their share prices increase the day after reporting earnings.

The names include: Church & Dwight, maker of products ranging from Arm & Hammer baking soda to Trojan condoms; retail giant Walmart; insurance company Brown & Brown; healthcare companies AbbVie, Johnson & Johnson, and Cardinal Health; payroll firm ADP; water-treatment company Pentair; and uniform supplier Cintas.

Write to Ian Salisbury at ian.salisbury@barrons.com

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December 02, 2024 14:52 ET (19:52 GMT)

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