The Federal Reserve is widely expected to cut short-term interest rates on Wednesday. Rates coming down should be a tailwind for dividend-paying stocks.
Which ones, however, is always the question. "Dividend payers in the financials sector" benefit, says Wolfe Research strategist Chris Senyek, including "banks."
Short-term rate cuts can also help banks earn more money, lowering their cost of funding.
That is a good place to start and the 10 banks in the Russell 1000 that analysts like the best are East West Banking, Western Alliance Bancorp, Wintrust Financial, Reinsurance Group of America, Webster Financial, FNB, Popular, Prosperity Bancshares, JPMorgan Chase, and First Citizens Bancshares.
The 10 yield an average of 2.3% and have paid out a relatively safe 25% of net income as dividends over the past 12 months. The average Buy-rating ratio for the 10 -- which is the number of Buy ratings divided by the total number of ratings -- is about 81%. The average Buy-rating ratio for stocks in the S&P 500 is about 55%.
Analyst ratings is only one way to identify stocks. As always a stock screen is just a start, a chance to uncover potential ideas. Each company has its own management team, strategy, and history that investors can dig into after a screen whittles down the investible universe of stocks to a more manageable level.
Falling rates also tend to help lower-yielding stocks a little more than higher-yielding stocks. That might feel counterintuitive, but it's the way some investment math works.
Barron's took another cue from Senyek to identify some additional dividend paying beneficiaries from falling rates. We looked at the low yielding stocks in the Russell 1000.
Senyek points out in his regular income investing updates that the highest yielding stocks typically have high yields for a reason and have higher risk of dividend cuts. The second highest quintile of dividend yields tend to outperform the highest yielders.
By that thinking the second-lowest quintile of stocks might get a bigger boost than those with the lowest yields, which investors probably don't hold for income, rather looking for growth in earnings.
Ten nonfinancial stocks with reasonable yields that Wall Street likes are Delta Air Lines, UnitedHealth, motion control company ITT, Walmart, LNG terminal operator Cheniere Energy, oil services provider Weatherford, chip maker Broadcom, electricity producer Vistra, Dell Technologies, and T-Mobile US.
Those 10 yield an average of 1.2% and have paid out about 48% of net income earned over the past 12 months as dividends. The average Buy-rating ratio for the 10 stocks is about 90%.
All 20 stocks can benefit from falling interest rates. Now investors have to watch what the Fed will do.