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Thursday, February 6, 2025

Wall Street’s Dividend Darlings: 3 Stocks Set to Pay Out?

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Dividend Stocks Poised to Outperform as Federal Reserve Prepares to Cut Rates

With the Federal Reserve expected to cut interest rates in September, dividend-paying stocks could be set to outperform the market. This is because the dividend yields on these stocks will become more attractive compared to the returns offered by other income-generating assets, including bonds.

Key Takeaways:

  • Interest rate cuts are expected to benefit dividend stocks, as they will become more attractive compared to bonds.
  • Top analysts are highlighting dividend stocks with strong financials and promising growth potential.
  • EPR Properties, Energy Transfer, and Walmart are three stocks that analysts believe are poised for success.

What Makes Dividend Stocks Attractive in a Falling Rate Environment

When interest rates fall, bond yields typically go down as well. This makes bonds less attractive to investors seeking income. However, dividend-paying stocks can provide a more consistent and potentially higher stream of income.

As interest rates decline, investors may seek out higher-yielding investments to maintain their income levels. This shift in investor sentiment can drive demand for dividend stocks, leading to price appreciation and even higher returns for shareholders.

Pinpointing Attractive Dividend Stocks: Analyst Insights to Guide Investors

With a vast universe of companies paying dividends, it can be challenging for investors to select the right stocks. TipRanks, a platform that ranks analysts based on their past performance, can provide valuable guidance. Here are three dividend stocks, recommended by Wall Street’s top pros, that are worth considering:

EPR Properties: Experiential Entertainment Real Estate

EPR Properties (EPR), a real estate investment trust (REIT), focuses on experiential properties such as movie theaters, amusement parks, eat-and-play centers, and ski resorts. EPR boasts a dividend yield of 7.3%.

RBC Capital analyst Michael Carroll recently upgraded his rating for EPR to buy from hold, raising the price target to $50 from $48. Carroll believes EPR has successfully navigated challenging operating conditions, including the COVID-19 pandemic and the recent actors/writers strikes.

Carroll expects theatrical box office revenue to reaccelerate in the second half of 2024 and into 2025, leading to higher percentage rents and a strengthened tenant base. He acknowledges concerns regarding EPR’s significant exposure to theaters, but he also notes that management plans to reduce this exposure over time.

Carroll further emphasizes that EPR’s high dividend yield is well-protected by its nearly 70% adjusted funds from operations payout ratio and a solid balance sheet with a 5.2-times net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio.

Energy Transfer: Capitalizing on Growing Natural Gas Demand

Energy Transfer (ET), a limited partnership and midstream energy company, recently announced a quarterly cash distribution of 32 cents per unit, reflecting year-over-year growth of 3.2% and a dividend yield of 8%.

Stifel analyst Selman Akyol highlighted that ET’s second-quarter results surpassed expectations and revealed several growth opportunities, particularly within the company’s Permian to Gulf Coast value chain.

Akyol believes the sentiment about natural gas is upbeat, as it is expected to play a crucial role in powering artificial intelligence data centers. ET’s strategic footprint positions it to capitalize on this rising demand, according to Akyol.

Additionally, ET benefits from increasing demand from utilities, particularly in Texas and Florida. These states offer attractive growth prospects due to their potential data centers and population growth. Akyol maintains a buy rating on ET stock with a price target of $19.

Walmart: Continued Growth Fueled by Value, Convenience, and Transformation

Walmart (WMT), the giant big-box retailer, recently impressed investors with its upbeat second-quarter results and raised its full-year outlook. The company also remains committed to rewarding shareholders through dividends and share repurchases.

Baird analyst Peter Benedict reiterated a buy rating on Walmart, increasing the price target to $82 from $70. He highlights that Walmart has gained market share in a challenging economic environment, thanks to its focus on value and convenience.

Benedict emphasizes that Walmart’s second-quarter results reflect the positive impact of its transformation efforts, with 70% of U.S. comparable sales growth digitally driven and over 50% of enterprise-wide EBITDA growth coming from higher-margin advertising and membership income streams.

He also cites Walmart’s trailing 12-month return on investment (ROI), which improved by 10 basis points to 15.1%. This improvement can be attributed to investments in areas such as automation and generative AI.

While falling interest rates may create a favorable environment for dividend stocks, investors should be cautious and conduct thorough due diligence. Not all dividend stocks are created equal, and some companies may face challenges that could impact their ability to maintain or increase dividend payouts.

Consider these key factors when evaluating dividend stocks:

  • Dividend Yield: A higher dividend yield may seem attractive, but it’s important to consider the company’s underlying financial health and its ability to sustain the dividend over time.
  • Dividend Growth History: Examine the company’s history of dividend increases. A consistent track record of dividend growth is a positive sign, indicating the company’s commitment to rewarding shareholders.
  • Payout Ratio: The payout ratio is the percentage of a company’s earnings that are paid out as dividends. A high payout ratio could indicate that the company is overextending itself and may be forced to cut dividends in the future.
  • Financial Strength: Analyze the company’s balance sheet and cash flow to assess its financial stability. A strong balance sheet and healthy cash flow provide a better cushion for future dividend payments.
  • Industry Trends: Consider the overall industry outlook and how it might affect the company’s profitability and its ability to continue paying dividends.

Conclusion: Seeking Growth and Income in a Changing Market

As the Federal Reserve prepares to cut interest rates, dividend stocks present a compelling opportunity for investors seeking both growth and income.

By carefully considering analyst recommendations and fundamental factors, investors can potentially identify high-quality dividend stocks poised to outperform in this evolving market environment. Remember, diversification is key, and investing in dividend stocks should be part of a well-balanced portfolio strategy.

Article Reference

Sarah Thompson
Sarah Thompson
Sarah Thompson is a seasoned journalist with over a decade of experience in breaking news and current affairs.

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