Citi Eyes Dividend Stocks Amid Fed Cuts, Tech Giants Join Trend

Key Takeaway

• Citi recommends dividend-paying stocks amid potential Fed rate cuts, highlighting Visa, Mastercard, and Lam Research for their growth potential.
• S&P 500 dividends expected to grow by 6.5% in 2024; Meta and Alphabet initiate dividends, signaling a trend among tech giants.
• Visa's earnings beat and positive analyst outlook underscore the appeal of dividend-growing stocks in a lower interest rate environment.

Dividend Stocks Gain Appeal

As the Federal Reserve signals a potential shift towards lower interest rates, Citi Research emphasizes the growing attractiveness of dividend-paying stocks. Scott Chronert, Citi's head of U.S. equity strategy, suggests that investors may pivot towards companies with robust dividend records as fixed income assets become less appealing. This shift is partly due to the anticipation that a less restrictive rate policy by the Fed will encourage diversification of income sources, including dividends. Chronert notes a positive market reaction to firms initiating dividend payouts, a change from past perceptions where such moves might have signaled slowing growth prospects. With S&P 500 dividends increasing by 5.2% last year and projections of a 6.5% growth in 2024, the trend towards dividend-paying stocks is gaining momentum.

Tech Giants Embrace Dividends

Even technology behemoths like Meta and Alphabet have joined the dividend-paying bandwagon, with Meta announcing its first-ever dividend and Alphabet following suit. This move underscores a broader acceptance among companies of the strategic importance of dividends in attracting investors. Citi Research has identified several S&P 500 stocks, including Visa, Mastercard, and Lam Research, as potential candidates for dividend growth, based on criteria such as buy ratings, historical dividend growth rates, and reasonable payout ratios. Visa, for instance, has seen its stock rise nearly 5% this year, buoyed by an earnings beat and a favorable analyst outlook.

Rate Hikes and Market Dynamics

Goldman Sachs warns that a higher-for-longer interest rate regime could pressure the stock market, advising investors to focus on companies with stable earnings growth. David Kostin, Goldman's head of U.S. equity strategy, points to persistent inflation and slowing GDP growth as factors likely to keep the Federal Reserve from implementing significant rate cuts. This environment has led Goldman to recommend stocks in noncyclical sectors like consumer staples and industrials, which tend to offer stable growth regardless of economic conditions. Companies such as PepsiCo, Colgate-Palmolive, and Waste Management are highlighted as resilient investment options.

Street Views

• Scott Chronert, Citi Research (Neutral on dividend-paying stocks):

  "Specific to dividend trends, we expect that the gradual shift by the Fed toward a less restrictive rate policy will result in investors diversifying their sources income, including dividends... Higher rates, and the market experience in 2022, has many investors favoring companies whose capital expenditures have a clear read-through to nearer-term cash flows." "In the past, markets may have taken this as a negative as it could have been viewed as sign of decelerating growth prospects."