Anika Begay
The Federal Reserve could start cutting rates as early as September, and income investors would be wise to snap up dividend-paying stocks that offer solid yields. Fed funds futures prices suggest a 100% chance that the central bank will ease interest rates at next month’s meeting, according to CME FedWatch. Bank of America economists expect the Fed to cut its target rate, currently between 5.25% and 5.5%, to 3.25% to 3.5% in mid-2026. That will likely send money market fund yields, now above 5%, tumbling. However, investors can still generate portfolio income if they snap up the right dividend stocks. “A decline in money market yields could lead to a shift in retiree assets toward stocks with higher dividend yields,” Savita Subramanian, equity and quantitative strategist at Bank of America, wrote in a note Thursday. Subramanian’s team looked at the S&P 500 for stocks that are expected to have dividend yields above the current 3-year Treasury yield of about 3.9% over the next three years. Investors should be aware that buying dividend stocks isn’t just about chasing the highest yields. High yields can be an indication that a company’s stock is on a steep downside trajectory. Too high a dividend yield can also raise questions about whether the company can sustain these payouts to investors. Here are some of the buy-rated names that Bank of America found. Data storage player Seagate Technology made the cut, with a three-year annualized dividend yield of 7.9%, according to Bank of America analysis. Bank of America analyst Wamsi Mohan reiterated his buy rating on the stock in late July after meetings with Seagate management. “We came away bullish on the potential for this cycle to be characterized by lower peaks and troughs (ultimately as demand slows),” Mohan wrote in a July 31 report. The analyst highlighted the potential for “slow and steady price increases” and gross margins that are higher than previous peaks in the meantime. “The company is not looking to chase stocks, but rather focus on profitability,” Mohan wrote. Shares are up 11% in 2024, and the stock offers a 2.9% dividend yield. STX YTD Mountain Seagate Technology in 2024 Regional bank KeyCorp also made the list from Bank of America. The firm said KeyCorp’s three-year annualized dividend yield is 6.3%. Bank of America rates KeyCorp a Buy and sees the company and its peers benefiting as the Fed scales back policy. “We believe gradual rate cuts (25 bp/q or every other meeting) should be manageable as the yield curve holds,” analysts led by Ebrahim Poonawala wrote on July 11. “The potential for lower rates to stimulate loan demand (has been fairly muted) should also provide net interest income/margin defensibility.” KeyCorp shares are up about 1% in 2024, and the stock offers a 5.6% dividend yield. KEY YTD KeyCorp Performance Mountain in 2024 Finally, Devon Energy got the green light from Bank of America. Devon, which the bank rates a buy, beat Wall Street estimates for core earnings per share in the second quarter this week, according to FactSet. Oil production also hit an all-time high of 335,000 barrels per day, beating Devon’s own guidance. The stock is roughly flat in 2024 and has a dividend yield of 4.4%. Other “buy” names being considered by Bank of America include Kraft Heinz, Merck and Simon Property Group.
