In a market characterized by uncertainty and elevated valuations, investors are increasingly looking towards dividend stocks as a potential source of income and portfolio stability, according to insights from Morgan Stanley strategist Todd Castagno. In a recent note, Castagno emphasized that dividends not only provide a dependable income but also reflect a company’s confidence, which can be crucial during turbulent market conditions.
Despite stock prices nearing all-time highs, October has already experienced significant volatility, with some of the most substantial single-day market losses recorded in history. Castagno pointed out that during periods of heightened risk and inflated valuations, dividends significantly contribute to total returns, reducing volatility and offering support for stock prices. He noted that when economic growth slows and interest rates decline, high-yield dividends become especially attractive as traditional cash and fixed income investments become less appealing.
In a noteworthy development, the Federal Reserve recently reduced interest rates by a quarter percentage point, although Chair Jerome Powell indicated that another cut in December isn’t guaranteed. This environment is prompting investors to consider companies that not only offer robust dividends but have also shown a consistent commitment to increasing them.
Morgan Stanley has identified a list of dividend stocks focusing on companies with market capitalizations over $100 billion that have increased their dividends by at least 15% quarter over quarter over the past year. Companies that raised their dividends have historically outperformed the market, with an average stock boost of 3.1% six months post-announcement, according to Castagno. He noted that companies with larger dividend increases tended to experience an even greater stock performance.
One of the highlighted companies is PG&E, which has a dividend yield of 0.64%. The utility company has significantly increased its payout by 150% quarter over quarter over the last 12 months. Although its third-quarter results were mixed, showing an adjusted earnings per share (EPS) of 50 cents—surpassing analyst expectations of 42 cents—and revenue of $6.25 billion, which fell below expectations of $6.41 billion, analysts maintain a buy rating on the stock, suggesting a potential upside of 35%. However, shares have seen a decline of 22% year to date.
Conversely, Goldman Sachs has enjoyed a strong year, with its stock price up 38%. The bank boasts a dividend yield of 2.03% and reported robust third-quarter earnings that exceeded Wall Street forecasts, driven by stronger investment banking and fixed income trading activities. Goldman Sachs has increased its dividend by 33.3% quarter over quarter in the past year, with analysts rating it as overweight and projecting a 4% upside from average price targets.
Eli Lilly has also made headlines following its latest earnings report, where the pharmaceutical giant not only surpassed expectations but also raised its full-year revenue outlook due to robust demand for its weight-loss treatment, Zepbound, and diabetes drug, Mounjaro. Eli Lilly has increased its dividend by just over 15% to $1.50 per share, resulting in a current yield of 0.71%. The company’s shares have appreciated by 10% year to date and have been rated overweight by analysts, with an expected upside of nearly 11%.
As market conditions fluctuate, it is increasingly clear that investors are turning to dividend-paying stocks not just for income, but as a strategic move to lessen risk during uncertain times.
