Dividend-paying stocks could rise in 2024. Investors like these plays for the new year

Published Thu, Dec 28 202311:00 AM ESTUpdated Thu, Dec 28 20233:17 PM EST

Dividend-paying stocks took a backseat to this year's tech-driven market rally, but 2024 could be the year that they come back in vogue. A confluence of factors stole the spotlight away from dividend-paying stocks in 2023. First, Big Tech names garnered gangbuster returns this year, with the Nasdaq Composite jumping more than 40% on excitement over artificial intelligence. Second, the Federal Reserve's rate-hiking campaign made Treasurys and other income-generating assets competitive against dividends. Consider that the Crane 100 Money Fund Index is carrying an annualized 7-day yield of 5.19% as of Dec. 27 and select banks are offering yields of more than 5% on 1-year certificates of deposit . A couple of catalysts could swing the pendulum back in favor of dividend payers in 2024, including the Fed's forecast for three rate cuts in the new year. "A lower interest rate environment – all else being equal in terms of the economic backdrop being healthy and job activity being strong – would tend to be good for the equity markets," said Charlie Gaffney, managing director at Morgan Stanley Investment Management and portfolio manager of the Eaton Vance Dividend Builder Fund (EIUTX) . "Not only do you get the dividend yield and dividend growth, but you get some capital appreciation perhaps – that's where it gets interesting," he added. Three factors Gaffney pointed to a trio of factors – growth, yield and valuation – that bode well for dividend payers in the approaching year. "The key that I think will work really well in 2023 are companies with solid business franchises – they are durable and can generate tremendous amounts of free cash to generate distributions and grow dividends in time," he said. For that reason, he set his sights on Broadcom , which is yielding 1.9% and has done "phenomenally well" in 2023 with a gain of 100%. The chipmaker has a strong growth opportunity ahead of it in the coming year, thanks to cloud computing and AI trends, Gaffney said. AVGO YTD mountain YTD performance for Broadcom (AVGO) "We like stories where you get above-average yield, but also capital appreciation," he said. "The investor gets the stock to work well and gets the income stream from the distributions and the dividend." The investor is in good company: Bernstein recently named Broadcom a top pick, saying that the stock is "benefiting from a robust AI story that bridges a nearer-term core slowdown as well as significant VMware accretion on the way." Broadcom closed its acquisition of VMware in late November. Gaffney is also a fan of Broadridge Financial Solutions, a company that provides proxy services and investor communications. The stock is up 52% this year, and it yields 1.6%. "They have been embedded with clients for so long and have great relationships, it's allowed them to build this economic moat across franchises," he said. The company also benefits from the digitization of markets and growth of trading activity. Broadridge's ability to grow margins and earnings translates to dividend growth, the investor added, making the stock "a classic compounder that will continue to deliver great returns to shareholders over time." Indeed, Evercore ISI recently added Broadridge to its tactical outperform list, naming it a winner in activist investor Nelson Peltz's proxy fight against Disney and citing Broadridge's "near monopoly in the street name proxy business ." Finally, Gaffney highlighted Allstate as a contrarian pick, noting that it's "perhaps underappreciated and overlooked by the market." The property-casualty insurer pays a 2.6% dividend yield, and shares are up 2% in 2023. "The key for the business in my view is the pricing environment is firming up," he said of Allstate. "They can pass through higher prices for businesses and services, and that should happen throughout the course of 2024 – that is an excellent tailwind that will allow them to drive growth and translate into the continuation of dividend payments and dividend growth," Gaffney said. Earlier this month, Piper Sandler analyst Paul Newsome raised his 2023 estimates on Allstate, calling for a loss of $1.56 per share – up from a loss of $2.31 per share – due to lower-than-expected November catastrophe losses and continued price increases. The firm has an overweight rating on the stock. Special dividend payers Kim Abmeyer, certified financial planner and founder of Abmeyer Wealth Management in Dallas, sees dividend-paying stocks coming into focus for 2024. "Broadly, they're going to become more important from a total return perspective for the foreseeable future," she said. The advisor anticipates a "sideways" market approaching rather than a continuation of this year's runaway growth, but dividend payers can help enhance total return when skyrocketing appreciation is hard to find. "Those growthy names have experienced such extreme growth, we'll have to see some kind of rotation," Abmeyer said. Stocks Abmeyer likes include Costco Wholesale , which recently announced a special cash dividend of $15 a share. Shares of the retailer have run up 46% in 2023, with a 12.5% gain in December alone. COST YTD mountain Costco Wholesale's YTD performance EOG Resources is another name on Abmeyer's list. The energy company in November announced that it raised its regular dividend by 10% and it declared a $1.50 per share special dividend. Its shares are down 4% in 2023. Indeed, Roth MKM's Leo Mariani rates EOG a buy. In a note earlier this month, he cited "its high cash flow yield, including special dividends, better production growth vs peers, best in class balance sheet and the potential around its emerging U.S. oil plays." "The good ones – the dividend payers and the special dividends – you can find safety in that space," Abmeyer said.