Which Dividend Stocks Does Bank of America Recommend for Strong Performance?

The recent strengthening of Bank of America's U.S. Regime Indicator suggests a recovery phase in the economy, potentially benefiting dividend stocks. This indicator, which incorporates various economic and corporate data, has shown fluctuations since February 2022 but indicates a positive trend as of August. Savita Subramanian, an equity and quant strategist at the bank, highlighted that high-dividend yield strategies historically outperform during such recovery phases. Investors should focus on sustainable dividend yields rather than merely high yields, as the latter may indicate underlying distress in companies.

Last updated: 25 October 2023 (BST)

Key Takeaways

• Bank of America's U.S. Regime Indicator reflects a strengthening recovery phase.
• High-dividend yield stocks have historically outperformed during recovery.
• Investors should seek sustainable dividends rather than just high yields.
• Several companies from the Russell 1000 offer promising dividend yields.
• Dividend contributions to market returns may increase compared to the past decade.

Understanding the U.S. Regime Indicator

The U.S. Regime Indicator by Bank of America is a composite measure that assesses economic conditions based on various macroeconomic and corporate data points. It helps investors gauge the broader economic climate and make informed decisions about asset allocation. A strengthening indicator signifies improved conditions that can lead to a recovery phase, which is favourable for certain types of investments, particularly dividend-paying stocks.

Economic Context and Recovery Phase

Since February 2022, economic signals have experienced significant volatility, influenced by factors such as inflation uncertainty and geopolitical tensions. However, the recent uptick in the U.S. Regime Indicator suggests that the economy is moving towards a recovery phase, potentially stabilising after a period of unpredictability. Historically, recovery phases tend to enhance the performance of equities, particularly those with reliable dividend payouts.

Dividend Stocks: An Attractive Investment Strategy

High-dividend yield stocks have been a popular choice among investors, especially during recovery phases. According to Subramanian's analysis, these stocks have outperformed the equal-weighted S&P 500 by an average of 5.6% in unconstrained investment styles and 4.5% in sector-neutral styles during previous recovery periods. As interest rates remain relatively low, dividends may play a more significant role in total returns, marking a shift from the past decade when capital appreciation often took precedence.

Key Strategies for Selecting Dividend Stocks

While high yields can be appealing, investors should be cautious. A company offering a high dividend yield may be experiencing distress, leading to a potential dividend cut. Subramanian advises investors to look for stocks with above-market but not excessive dividend yields, which tend to indicate financial health and stability. This approach promotes a more sustainable investment strategy, focusing on companies that can maintain their dividend payments even during market fluctuations.

Identifying Promising Dividend Stocks

To identify suitable dividend stocks, Bank of America analysed companies within the Russell 1000, ranking them based on their trailing 12-month yields. Stocks in the second quintile—those that yield above average but are not overly stretched—are generally less likely to include companies facing distress. This quintile also applies a "buy low, sell high" valuation discipline, ensuring that companies moving down to lower quintiles are doing so due to stock price increases faster than dividend growth.

Highlighted Dividend Stocks for September

Bank of America's analysis for September identified several companies that stand out for their dividend yields and overall market performance. Here are a few notable examples:

Regions Financial (RF)

Regions Financial, a regional bank operating primarily in the South, Midwest, and Texas, boasts a dividend yield of 3.92% and has seen nearly a 16% gain this year. Analysts rate the stock as overweight, with a potential upside of 6.2% relative to its average price target. D.A. Davidson recently labelled Regions a "best-of-breed" company, highlighting its competitive advantages and leading profitability metrics.

AvalonBay Communities (AVB)

AvalonBay Communities, a real estate investment trust (REIT) focused on apartment communities, has an attractive dividend yield of 3.57%. Despite a near 11% decline year-to-date, it has an average analyst rating of overweight and a potential upside of nearly 12%. Analysts remain optimistic about AvalonBay's long-term growth prospects in the housing market.

Exelon (EXC)

Exelon, a utility company yielding 3.68%, has experienced a 15% rise this year. The company recently reported significant demand for electricity, driven by a booming data centre sector. With plans to expand its data centre client base, Exelon is well-positioned for future growth. The stock holds an average rating of hold, with an 8.5% upside to its average price target.

Amgen (AMGN)

Biotech giant Amgen offers a dividend yield of 3.43% and has risen over 6% this year. The company is investing more than £600 million in a new research facility in California, reinforcing its commitment to growth in the U.S. market. With strong analyst ratings and a 12% potential upside to its average price target, Amgen remains a robust choice for dividend-focused investors.

Conclusion: The Future of Dividend Stocks

The potential recovery phase indicated by Bank of America's U.S. Regime Indicator suggests that now may be an opportune time for investors to consider high-dividend yield stocks. Focusing on companies with sustainable dividend yields rather than simply high yields can lead to more stable and rewarding investment outcomes. As the economic landscape continues to evolve, dividends may play a crucial role in total returns, making it essential for investors to adopt a discerning approach when selecting dividend stocks.

As the market shows signs of recovery, will you reassess your investment strategy to include dividend stocks? #DividendStocks #InvestmentStrategy #EconomicRecovery

FAQs

What is the U.S. Regime Indicator?

The U.S. Regime Indicator is a composite measure from Bank of America that assesses economic conditions using a combination of economic and corporate data. It helps investors understand the overall economic climate.

Why are dividend stocks important during recovery phases?

Dividend stocks often outperform in recovery phases due to their stable income generation, providing investors with returns even in volatile markets. They also tend to be less risky compared to non-dividend-paying stocks.

How should investors approach high-dividend yield stocks?

Investors should seek stocks with sustainable dividends rather than merely high yields, as high yields can indicate financial distress. It's important to consider the company's overall financial health.

What companies are currently recommended for dividend investing?

Regions Financial, AvalonBay Communities, Exelon, and Amgen are highlighted as promising dividend stocks due to their attractive yields and positive performance outlooks.

How does the economic environment affect dividend yields?

The economic environment influences dividend yields through interest rates and overall market performance. In low-interest-rate periods, dividends can become a more significant part of total returns.