Citi says investors should focus on dividends, lists several buy-rated income stocks to buy

Published Mon, Apr 29 20242:10 PM EDTUpdated Mon, Apr 29 20243:19 PM EDT

As the Federal Reserve considers lower rates in the near future, it may be time for investors to consider dividend-paying stocks as another income stream, according to Citi. Lower interest rates would mean that some investments, such as fixed-income assets, will look less attractive than they once did. Therefore, investors would be incentivized to buy companies with a strong record of dividend payments. "Specific to dividend trends, we expect that the gradual shift by the Fed toward a less restrictive rate policy will result in investors diversifying their sources income, including dividends," wrote Scott Chronert, Citi Research's head of U.S. equity strategy. "Higher rates, and the market experience in 2022, has many investors favoring companies whose capital expenditures have a clear read-through to nearer-term cash flows." Against this backdrop, investors are rewarding firms that initiate dividend payouts with an initial positive price reaction. "In the past, markets may have taken this as a negative as it could have been viewed as sign of decelerating growth prospects," Chronert added. The strategist expects more companies to add dividend payouts as firms increasingly understand the appeal for investors. S & P 500 dividends grew by 5.2% last year, but analyst consensus estimates suggest that dividends could grow by 6.5% in 2024 — a number Chronert suspects is still conservative given his 10% earnings growth outlook. The strategist added that in the past year, 13 companies initiated a dividend, and 323 firms increased their payouts. Only 23 companies decreased their dividends. Even megacap technology titans are joining the hype. Meta's board authorized its first-ever dividend in February, while Alphabet on Thursday announced that it will issue a 20-cent dividend in June for the first time. In a lower interest rate environment, dividend-growing tickers could be a lifeline for investors to keep a steady stream of income. In the same report, Chronert screened for stocks in the S & P 500 that have the potential earnings power to grow their dividend payouts this year. The stocks had to meet the following criteria: Buy-rated by Citi Research 3-year dividend per share with a compound annual growth rate above 5% Above median expected dividend growth Potential dividend per share upside Reasonable payout ratio Reasonable dividend yield One name on the list was Visa , which currently has a dividend yield of 0.7%, according to Citi Research. The credit card company has a buy rating from most analysts covering the stock, with the average price target calling for a 13% upside. Shares of Visa popped last week after the company posted an earnings beat for its second fiscal quarter. The company reported adjusted earnings of $2.51 per share on $8.78 billion of revenue, higher than the $2.44 per share on $8.63 billion of revenue expected by analysts polled by LSEG. Visa stock is now up nearly 5% this year. Fellow credit card payment company Mastercard currently has a dividend yield of 0.6%. Analysts are overwhelmingly bullish on the stock and forecast a 12% upside. Earlier this month, TD Cowen initiated coverage of Mastercard at a buy rating. Analyst Bryan Bergin said he believes that international markets, specifically Asia and Europe, should drive growth opportunities for the firm. Shares of Mastercard are 7% higher this year. The company is expected to report its latest earnings before Wednesday's opening bell. Semiconductor firm Lam Research also made the list, with a dividend yield of 0.9%. More than half of analysts covering the stock rate Lam a buy or strong buy and see a potential upside of nearly 6%. Earlier in April, B. Riley upgraded the company to a buy rating , saying it was more confident about the company's "revenue ramp potential." Lam Research stock is nearly 19% higher this year. The company posted a third-quarter earnings and revenue beat last week while also issuing strong guidance on adjusted earnings for its current quarter. — CNBC's Michael Bloom contributed to this report.