By Lucas Downey, TradeSmith, Trades Of The Day, 2024-09-25
When the Federal Reserve cut rates by 50 basis points last week, it was a huge moment for income investors who've enjoyed a juicy 5%+ yield in their money-market accounts… but not a positive one.
Soon, those account statements will feel skinnier as the income stream begins to trail off.
And with current forecasts of an additional 50 basis points in cuts in 2024 and 100 basis points in 2025… before long, investors will view money markets as more of a drag rather than the cash machine they were for the last year.
This is where the opportunity arises now.
As one popular income play drops, another will pop.
It shouldn't come as a surprise that income-hungry investors will seek an alternative to the collapsing money-market rates.
As a result, one ultra high-quality area is set to thrive: dividend growth stocks.
The rotation has already begun…
Dividend stocks have been beating the pants off the market recently, and with the reality of further steep rate cuts on the horizon, this asset class will continue to benefit.
Today, we'll size up the current interest-rate landscape. Then we'll spot the hidden income rotation under the surface of the market.
Stick around and I'll serve up an all-star stock to help you get ahead of the income heist facing so many investors…
Where Trillions in Money-Market Cash is Headed
The money-market bonanza was fueled by multi-decade-high rates. But make no mistake: the current 5% payout is set to decline rapidly.
Below shows just how high yields still are relative to history:
Money-market rates got so high, a record $6.3 trillion is parked there right now.
And that's up $1 trillion since January 2023, when that number stood at $5.3 trillion.
That equates to nearly 19% growth:
Now, if the reason money rushed towards this asset class is simply due to the juicy payout stream, it's clear that falling rates will make this hideout less appealing.
And what's incredible is there's evidence already pointing to an income alternative – dividend stocks.
If only a sliver of the $6.3 trillion starts flowing towards this equity-income oasis, the group will remain buoyant.
Facing a Money-Market Dilemma, Dividend Stocks are a Great Alternative
The S&P 500 has been zigging and zagging the last two months, up only about 1.4% since July 10.
But in June, we alerted you to an incredible equalizer trade set in motion. And had you followed our guidance, you'd be up a whole lot more.
For me, July 11 was the line in the sand for one of the biggest rotations in recent memory. The June CPI effectively greenlighted the Fed to start cutting rates.
What initially began as a rush out of mega-cap tech and into small caps has continued to twist and turn along the way. Hidden in all this money shuffling was a massive inflow into dividend stocks.
Check this out. If you single out S&P 500 stocks that pay a dividend vs the index, you'll see that dividend payers, on average, are beating the rest of the major cap-weighted index by 5X.
From July 10 – Sept. 19, S&P 500 dividend stocks have jumped an average of 8.4% vs. the 1.4% gain for the broad index:
The left-for-dead pockets of the market are now thriving – like health care, staples, discretionary, REITs, financials, and utilities.
And as money-market rates are set to fall hard and fast… income seekers will target this particular income haven.
Let me give you a live example.
Over a month ago I discussed dividends as a way to massively outperform. In the piece I singled out Home Depot (HD) as a solid dividend choice. (Disclosure, I have been an HD investor for years.)
As you can see, since July 10, dividend-growth stalwart HD has easily outpaced the SPDR S&P 500 ETF (SPY):
Folks, the money wheel is already in motion. You should be looking to fill the coming money-market income void with high-class dividend names with a strong business and a history of rewarding shareholders with raises.
Homebuilder D.R. Horton (DHI) also fits the bill. As you can see, since the great rotation was set in motion on July 11, shares have ripped over 38%:
Given how higher rates froze real-estate transactions, melting interest rates will surely boost the homebuilder marketplace.
D.R. Horton's dividend yield is currently low, at 0.6%, but don't be fooled and assume this isn't a dividend-growth name worth your time. It continues to raise its payout every year and has a payout ratio well below the S&P 500's 35%; any company like that is worth a second look.
On a five-year basis, DHI has increased its dividend 100%. Even more impressive is the ultra-low payout ratio of 8%. That just signifies how much room they have to raise the dividend.
I'd also suggest you review one of my favorite near-term indicators – Jason Bodner's Quantum Score – for the Go signal.
As you can see, DHI is well into the buy zone with a super strong 81 Quantum Score, grounded in stellar fundamentals and technicals.
Few companies ever get to this rare leaderboard:
Don't make investing complicated. Follow the money into the best stocks.
Dividend-growth should be a part of any portfolio as far as I'm concerned. Especially right now.
And as money market rates keep heading South, my bet is many more investors will come to this same conclusion. The money wheel is already in motion!
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
Source: TradeSmith
The post 2 Stocks to Kickstart a Dividend-Growth Portfolio appeared first on Trades Of The Day.
