Dividend-paying Stocks Are Expected to Rise in 2024. Investors Like These Plays for the New Year

Dividend-paying stocks found themselves overshadowed by the tech-driven market surge this year, but there's a growing sentiment that 2024 might witness a resurgence in their popularity.

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Several factors contributed to dividend stocks taking a backseat in 2023. Firstly, the remarkable returns of Big Tech, with the Nasdaq Composite surging over 40%, fueled by enthusiasm for artificial intelligence, stole the spotlight. Secondly, the Federal Reserve's campaign of raising interest rates made income-generating assets like Treasurys more competitive compared to dividends. The Crane 100 Money Fund Index, for instance, displayed an annualized 7-day yield of 5.19% as of December 27, while select banks offered yields exceeding 5% on 1-year certificates of deposit.

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However, as the financial landscape evolves, 2024 could mark a return to favor for dividend-paying stocks. A crucial catalyst is the Federal Reserve's projection of three rate cuts in the coming year.

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Charlie Gaffney, managing director at Morgan Stanley Investment Management and portfolio manager of the Eaton Vance Dividend Builder Fund (EIUTX), highlighted three factors—growth, yield, and valuation—that position dividend payers favorably in the upcoming year. In an environment of lower interest rates, assuming a healthy economic backdrop and strong job activity, equities, especially those with solid business franchises, tend to perform well.

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Gaffney spotlighted Broadcom, a chipmaker yielding 1.9%, and Broadridge Financial Solutions, a company in proxy services and investor communications yielding 1.6%, as potential winners in 2024. He emphasized the importance of companies with durable business franchises that can generate significant free cash for distributions and dividend growth.

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Broadcom's growth potential is underscored by trends in cloud computing and AI, and it has been lauded as a top pick by Bernstein. Broadridge, on the other hand, benefits from long-standing client relationships and the digitization of markets.

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In a contrarian move, Gaffney identified Allstate as a noteworthy pick, citing an underappreciated market presence. Allstate, a property-casualty insurer with a 2.6% dividend yield, stands out due to its firming pricing environment. Gaffney anticipates that the ability to pass through higher prices for businesses and services will be a significant tailwind in 2024, supporting continued dividend payments and growth.

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Certified financial planner Kim Abmeyer sees dividend-paying stocks gaining importance in 2024, particularly in a potentially sideways market. These stocks could enhance total returns when compared to high-growth names experiencing extreme appreciation. Abmeyer highlighted Costco Wholesale, which recently announced a special cash dividend of $15 a share, and EOG Resources, an energy company that raised its regular dividend by 10% and declared a $1.50 per share special dividend.

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As the market dynamics evolve, dividend-paying stocks are poised to play a more prominent role in investor portfolios, offering stability and income in a changing financial landscape.