Top 3 Dividend Stocks Primed For A Fed Rate Cut

Federal Reserve: Rates and the Economy

Over the last month, mixed economic signals have contributed to huge vacillations in markets. The Dow, Nasdaq, and S&P 500 all went into a bracing spiral on Monday, August 5th, coming off of a weaker-than-expected July jobs report and lower PMI figures that stoked recessionary fears. However, positive CPI data helped push markets to finish their best week of the year on August 16th.

At the Jackson Hole Economic Symposium last Friday, Federal Reserve Chair Jerome Powell all but certified that the Fed will go ahead with rate cuts in September. However, investors remain mixed on the level of rate cutting that will transpire. The table below illustrates the swings in sentiment about the September 18th FOMC meeting. As of July 25th, the probability of a 50 bps rate cut stood at a mere 11.3%, but following Powell’s remarks that figure climbed to 38.5% over the weekend.

This would mark the first rate cut since March 2020 and could have consequences for global equities of all varieties, including dividend stocks.

Dividend Stocks in a Rate-Cutting Environment

A cycle of monetary easing can impact dividend stocks in a number of ways. Dividend stocks can become a more attractive option, as investors search for yield that has diminished in bond markets. Cheaper debt financing can also free up more cash that can be reinvested back into the business, creating potential growth opportunities that might be less available in a higher-rate environment. The below chart illustrates how varying types of dividend stocks perform at different periods following a rate cut. Dividend payers tend to outperform non-dividend payers across time periods following rate reductions, with dividend growers performing the best.

Sectors That Perform Well in a Declining Rate Environment

In a declining rate environment, certain sectors often outperform due to the positive effects of lower interest rates on their cost structures, profitability, and demand for their products or services. Key sectors that tend to benefit include Real Estate, Financials, and Consumer stocks.

Real Estate may thrive as lower interest rates reduce borrowing costs, making it more affordable for companies and individuals to finance property purchases. This can drive up demand for real estate, enhancing the sector’s performance.

Consumer stocks can also benefit as lower interest rates increase consumer spending by reducing the cost of borrowing for items like homes, cars, and other significant purchases, particularly within the consumer discretionary sector.

In the Financials sector, while banks typically gain from higher interest rates due to improved net interest margins, certain segments may still perform well in a declining rate environment. These segments benefit from increased investment activity and cheaper financing costs. Additionally, lower rates generally lead to a rise in consumer borrowing, boosting revenue for financial institutions through higher loan origination volumes, including mortgages, auto loans, and credit card debt.

The SA Quant team has identified three dividend-paying stocks that are well-positioned for rate cuts. While all of these stocks offer favorable dividend yield, they are also evaluated along other SA Quant Dividend Grades, including dividend safety and dividend growth. The dividend safety grade leverages a sophisticated data-driven approach to offer a reliable assessment of a company’s ability to keep paying its dividends and avoid dividend cuts.

Similarly, the dividend growth grade provides an instant characterization of a company’s ability to grow its dividends. This is a valuable tool for income-focused investors who want to pinpoint companies with better dividend growth potential.

In addition to dividend grades, the stocks below also score well across other Quant Ratings and Factor Grades and represent a mix of sectors.

1. Alexander & Baldwin, Inc. (ALEX)

• Forward Dividend Yield: 4.67%
• Dividend Yield Grade: C+
• Market Capitalization: $1.38B
• Quant Rating: Strong Buy

ALEX is a diversified REIT that is based in Honolulu, HI. The company owns and operates a portfolio of properties throughout the Hawaiian islands, with an emphasis on retail. In addition to its retail properties, its portfolio includes office centers, industrial assets, as well as ground leases. The company has been adversely affected by both the lingering effects of COVID, as well as the 2023 Maui wildfires, from which tourism has still not fully recovered. A potential rate cut could enable the company to pursue internal growth opportunities, as well as acquisitions, which were highlighted in its Q2 earnings call.

“We also have five photovoltaic projects in various stages of development. Combined, these projects are expected to add between $400,000 and $600,000 of incremental NOI as they come online in the next 18 months.

In addition to these internal opportunities, I am encouraged by the volume of investments we are seeing externally. Although pricing remains challenged with wide bid ask spreads, we will be opportunistic with capital recycling to make accretive acquisitions. Clayton will speak to the strength of our balance sheet, ” said Alexander & Baldwin CEO, Lance Parker.

ALEX is ranked 6 out of 179 covered securities in the Real Estate sector and 2 out of 14 in Diversified REITS and displays positive dividend safety and growth grades. ALEX has a strong three-year CAGR dividend growth rate of 24.49% coupled with a below-average cash dividend payout ratio, which is an indicator of the company’s ability to continue paying its current dividend.

ALEX Stock Dividend Scorecard

ALEX has scored well in terms of both EPS revisions, as well as momentum. Its recent price performance has beaten sector medians for the 3, 6, and 9-month performance periods. The same can be said for its revisions, with a positive revenue surprise, beating estimates by $2.75M. These characteristics, coupled with solid financials contributing to the dividend growth and safety grades, make ALEX a potential opportunity for a lower-rate environment.

ALEX Stock Factor Scorecard

2. Ingredion Incorporated (INGR)

• Forward Dividend Yield: 2.36%
• Dividend Yield Grade: B
• Market Capitalization: $8.59B
• Quant Rating: Strong Buy

Ingredion Incorporated is a global ingredients provider that specializes in the production and distribution of specialty ingredients such as sweeteners, thickening starches, as well as plant-based proteins. The company’s products have a wide range of applications in consumer food, animal feed, as well as pharmaceuticals and are available in 120 countries. INGR recorded a strong Q2 2024, with record profitability attributed to volume growth and lower input costs. Some product segments of INGR’s portfolio are poised to benefit in the near term, as easing inflation will likely help encourage consumer spending. Regardless of the interest rate environment, INGR’s profitability may remain vulnerable to unexpected increases in input costs, as well as currency fluctuations. What INGR lacks in dividend yield, it makes up for in other dividend grades. The company has a low cash dividend payout ratio, at 19.96%, which is a -59.33% reduction relative to the sector median, an indicator of the safety of its dividend.

INGR Stock Dividend Scorecard

At the same time, the trailing twelve-month 1-year dividend growth rate is 9.86%, and there have been 13 consecutive years of dividend growth. The company is also trading at attractive valuation multiples, with a forward P/E of 12.66, a -35.18% reduction compared to the sector median. This means INGR can offer some value to investors, alongside its strong dividend profile.

3. Synchrony Financial (SYF)

• Forward Dividend Yield: 2.12%
• Dividend Yield Grade: B+
• Market Capitalization: $18.65B
• Quant Rating: Strong Buy

Synchrony Financial is a consumer financial services company that specializes in consumer financing programs for retailers and healthcare providers. This includes store and co-branded credit cards, as well as savings products that help fund its lending operations. Synchrony has performed well in the last year, delivering +48.47% on a trailing 1-year basis, despite the inflationary pressures that might have otherwise put a damper on consumer spending.

SYF Stock Dividend Scorecard

Despite a modest 2.12% forward dividend yield, SYF has demonstrated its commitment to delivering shareholder value. In Q2 2024, Synchrony returned $400M to shareholders, consisting of $300M in share repurchases and $100M of common stock.

“Synchrony remains well-positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions and subject to our capital plan. Combining those results, Synchrony delivered a second quarter performance largely within our expectations. We remain focused on taking appropriate actions to prepare our business for years to come, including our ability to deliver our long-term targeted loss rate between 5.5% and 6% and average return on assets of at least 2.5% on average over time. We’ve been closely monitoring our performance and taking prudent credit actions in support of these objectives,” said Brian Wenzel, EVP & CFO of Synchrony.

Synchrony has been explicit about its strategy to get ahead of the rising trend of delinquencies by focusing on disciplined credit underwriting and management.

“And while our credit trends relative to pre-pandemic levels have outperformed most of the industry today, we have leveraged these strengths to take action in our portfolio where we have seen indications of higher probability of default. These credit actions, along with a more selectively spending consumer, have contributed to lower new account and purchase volume growth in the second quarter, but have also improved our recent delinquency trends and should strengthen our portfolio’s credit trajectory in 2024,” said Brian Doubles, President and CEO of Synchrony.

In a reduced rate environment, Synchrony could face headwinds from compressed net interest margins, but that has the potential to be offset by an expansion in lending due to lower rates.

SYF Stock Factor Scorecard

Synchrony scores very well from both a valuation and profitability perspective. It is trading at a deep discount relative to sector medians, with a forward P/E of 6.10 vs. 11.91 and a trailing twelve-month price-to-cash flow ratio of 1.96 vs. 8.97. Cash from operations is also a standout with 9.53B vs. the 154.16M vs. the sector median. The combination of these ratios bode well for SYF, in addition to favorable dividends.

Concluding Summary

Regardless of the degree to which the Fed might decide to cut rates, dividend stocks have the potential to benefit. As investors hunt for yield, dividend equities can offer an opportunity to outperform. To capitalize on this dynamic, three well-positioned dividend stocks have been highlighted: Alexander & Baldwin, Inc., Ingredion Incorporated, and Synchrony Financial. These companies offer attractive yields, along with strong valuation and profitability profiles, making them well-suited to navigate the evolving interest rate landscape.

We have many stocks with strong buy recommendations, and you can filter them using stock screens to suit your specific investment objectives. Consider using Seeking Alpha’s ‘Ratings Screener’ tool to help find stocks that achieve diversification into desired sectors you like. Alternatively, if you’re looking for a select number of Quant Strong Buy recommendations on a monthly basis, you might want to explore Alpha Picks.

• I am Steven Cress, Head of Quantitative Strategies at Seeking Alpha. I manage the quant ratings and factor grades on stocks and ETFs in Seeking Alpha Premium. I also lead Alpha Picks, which selects the two most attractive stocks to buy each month, and also determines when to sell them.