Now may be a good time to start buying stocks with high dividend yields, according to BMO Capital Markets. The S&P 500 stocks with the highest dividend yields have significantly underperformed the index over the past year and a half, despite a recovery in recent months, chief investment strategist Brian Belski said. Higher long-term interest rates have weighed on the index since investors found attractive yields in the bond market. Yields are expected to start falling once the Federal Reserve starts cutting rates. According to the CME FedWatch tool, which is based on traders’ bets, the market is pricing in a 100% probability of a rate cut at the central bank’s September meeting. “The relationship between these stocks and interest rates has been misunderstood in recent years, and their significant underperformance was likely an investor overreaction,” Belski wrote in a July 30 note. “However, the high likelihood that the Fed will cut rates sooner than expected could lead to lower long-term rates in response, but this should still be a driver of upside.” He added that BMO’s historical trend analysis shows that this kind of underperformance is usually followed by a “remarkable recovery.” Moreover, Belski noted that the severity of the underperformance does not seem to match the group’s fundamentals. Below are some of the high-dividend stocks on BMO’s buy list. It is rated outperform by the firm’s analysts and is in the top 25% of S&P 500 stocks by dividend yield. Two pharmaceutical companies are among the stocks BMO expects to outperform. Pfizer’s dividend yield is 5.73% and is up about 2% year-to-date as of Tuesday’s close. Pharmaceutical giant AbbVie said last week that its second-quarter sales and adjusted earnings beat expectations by a wide margin. The company, which benefited from a cost-cutting program and better-than-expected sales of its COVID-19 treatment, also raised its full-year outlook. Pfizer is also developing a once-daily weight-loss drug. The company said in July that early-stage trials had produced “promising” data and that it plans to conduct further early-stage trials later this year. Meanwhile, AbbVie shares, with a 3.34% dividend yield, are up nearly 20% year to date. AbbVie is looking to expand its pipeline as Humira faces generic competition. Last week, the company completed its $8.7 billion acquisition of Cerebelle Therapeutics, which is developing a number of drugs to treat neurological and psychiatric disorders. In February, it completed its $10 billion acquisition of Immunogen, a developer of cancer treatments. Among the utilities on the list are American Electric Power and Southern Company. The former has a dividend yield of 3.58% and the latter 3.33%. Utilities have been one of the best-performing sectors in the S&P 500 this year, driven by demand for electricity to power artificial intelligence data centers. The sector has risen about 16% year to date. Meanwhile, American Electric Power shares have risen 21% so far this year, while Southern has risen more than 23%. Meanwhile, real estate has been one of the worst-performing sectors in the S&P 500 so far this year, up 4% versus the S&P’s gain of about 16%. BMO is bullish on real estate investment trusts and thinks the sector is poised for a turnaround. Two companies on the list are Digital Realty Trust and Host Hotels & Resorts. Digital Realty Trust, which pays a 3.28% dividend yield, owns, develops and operates data centers, which are expected to see a surge in demand thanks to AI. Last week, the company announced that its second-quarter core operating cash flow beat expectations, but revenues missed expectations. The stock is up about 10% year to date. Host Hotels & Resorts, which owns luxury and upper upscale hotels, has a dividend yield of 4.92% and is down 16% so far this year. The company’s second-quarter operating cash flow slightly beat expectations last week and revenues were in line with expectations. However, the company lowered its full-year guidance for operating cash flow and adjusted earnings before interest, taxes, depreciation and amortization.
These Dividend Stocks Could Rebound as Interest Rates Fall, Says BMO
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