Bank of America argued Thursday that dividends will see increased importance as investors focus more on total returns in the current investment environment.
“We believe we are now in a total return world in which the contribution of dividends to total market returns could be significantly higher than it was in the last decade, a period marked by falling cash yields and lofty price returns,” the firm’s equity and quant strategy team stated in a note to clients.
As part of this strategy, BofA recommended investors “seek out companies with above-market and secure (not stretched) dividend yields.”
To locate potential dividend opportunities, the financial institution separated dividend-paying stocks in the Russell 1000 into five groups, sorted by their dividend yield. The firm advised investors to focus on the second-highest grouping of dividend yielders in the index (identified in the chart below as Quintile 2).
The company noted that some companies with high dividend yields can represent a riskier investment — those with dividends that are “stretched.” Thus, the firm suggests gravitating towards the second group, which offers relatively high dividend payouts, but significantly lower risk of loss. See chart below:
Among some of the names that fall in Quantile 2 include the likes of HP Inc. (NYSE:HPQ), Phillips 66 (NYSE:PSX), Morgan Stanley (NYSE:MS) and Gilead Sciences, Inc. (NASDAQ:GILD). From a dividend yield perspective HPQ provides a dividend yield of 3.72%, PSX sits at 3.63%, and MS and GILD both provide a 3.38% dividend yield.
For another approach to dividend investing, see the markets five largest dividend focused exchange traded funds: Vanguard Dividend Appreciation ETF (VIG), Vanguard High Dividend Yield Index ETF (VYM), Schwab US Dividend Equity ETF (SCHD), iShares Core Dividend Growth ETF (DGRO), and iShares Select Dividend ETF (DVY).
In broader financial news, stock index futures remain relatively unchanged on Thursday morning as Wall Street looks ahead to more jobs data.