- Dividend stocks are set to surge as investors deploy $6 trillion from money-market funds, Bank of America says.
- Investors could be looking to invest their cash as the Fed gets ready to cut interest rates in September.
Dividend-paying stocks are poised to surge in the second half of the year as investors start to deploy the $6 trillion sitting in money market funds, according to Bank of America.
Strategist Savita Subramanian called the dividend trade a "pain trade," meaning the bulk of investors are not properly positioned for the potential upside gains in dividend-paying stocks.
"Over $6 trillion sits in US money market funds as the Fed is poised to start cutting rates," Subramanian said in a note this week. "Bond funds have seen record flows YTD, but we see more opportunities within equities for investors searching for yield."
There are more than 200 S&P 500 stocks that offer a higher real return potential than the 2% offered by the 10-year Treasury yield, according to the note, and about 75% of those stocks are under-owned by professional investors.
Some of the highest-yielding S&P 500 companies include Walgreens Boot Alliance, Altria, Verizon, Ford, and AT&T. And while the S&P 500 as a whole offers a dividend yield of about 1.25%, there are nearly 300 S&P 500 stocks that offer a higher yield.
"Overall, we expect dividends to make up a larger proportion of returns than the outsized price returns and multiple expansion of the past decade," Subramanian said.
BMO's Brian Belski is another Wall Street strategist who expects big gains to be had from dividend paying stocks, especially after their lackluster performance since the October 2022 stock market bottom.
"We believe these stocks have turned the corner and recent relative strength is likely to persist in the coming months," Belski said in a note on Tuesday. "With the Fed now likely to cut rates sooner than previously anticipated, the likely drop in longer-term yields in response should provide a boost."
Some of the high-paying dividend stocks recommended by Belski include Abbvie, Chevron, Duke Energy, Gilead Sciences, and Pfizer.
As investors hunt for yield at a time when interest rates are about to fall, dividend-paying stocks could be the underloved area of the stock market that is set to boom.
The Fed is expected to make its first interest rate cut of the current cycle at its September FOMC meeting.