23 Top Dividend Stocks to Buy Before Interest Rates Fall: BMO

Lower rates often boost economic growth by helping businesses and consumers borrow money and finance deals cheaper. Plus, they lift stock valuations since future earnings are valued higher. The flip side is that savers earn less on their money as yields on bonds and cash shrink.

Although many in the market are thrilled about the upcoming rate cuts, those looking for steady, consistent income may be disappointed as yields for low-risk and no-risk assets tumble.

However, investors can get the best of both worlds as rates fall by buying dividend stocks, which will still post sizable yields each quarter and appear to be primed for a rebound anyway.

The case for dividend stocks as rates slide

Dividend-yielding stocks suffered significantly in recent years as interest rates remained higher for longer. With ultra-safe assets like US Treasuries and high-yield savings accounts fetching 4% to 5%, there was less demand for equities with similar or inferior yields that also carried more risk.

High-yielders have made up some ground in the last few months, but the group is still oversold, as it has drastically lagged behind the S&P 500, according to BMO Capital Markets. But as rates fall, strategists at the Montreal-based firm expect dividend stocks to finally catch fire.

“We believe these stocks have turned the corner and recent relative strength is likely to persist in the coming months,” Brian Belski, BMO’s chief investment strategist, wrote in a late July note. “The relationship between these stocks and interest rates has been misunderstood in recent years, and their significant underperformance was likely an overreaction by investors.”

Although high-yielding stocks don’t always outperform, they rarely fare this poorly. Only once in the last three decades have S&P 500 companies with dividend yields in the top quartile trailed the index by this much, BMO found. And when they did, which was during the pandemic, they soon bounced back with force.

“This type of abnormal underperformance has typically proven to be an inflection point historically, and the past few months seem to suggest that historical trends are prevailing,” Belski wrote.

Besides lower interest rates and oversold conditions, dividend stocks have strong catalysts like dirt-cheap valuations and solid fundamentals, including solid earnings growth estimates.

Stocks with yields in the top quartile of the S&P 500 are trading roughly 10% lower than their long-term average on a forward price-to-earnings (P/E) basis and an astounding 35% cheaper when accounting for expected earnings growth, according to BMO. Meanwhile, the market’s earnings multiple has long been stretched compared to historical levels.

That discrepancy is unwarranted, in BMO’s view, considering that analysts are calling for high-yielding dividend stocks to enjoy above-average earnings growth in the next 12 months.

“Valuation remains at a meaningful discount while growth expectations have rebounded, indicating that investors are paying significantly less than average for anticipated growth,” Belski wrote.

23 top dividend stocks to buy now

Savers don’t have to wait until the Fed officially cuts rates to capitalize on the coming rally for high-yielding stocks. BMO thinks that group will take the baton from leading mega-cap growth stocks, alongside other long-suffering market segments like small- and mid-sized companies.

Below are the 23 stocks with dividend yields in the top 25% of the S&P 500 index that are also outperform-rated by BMO analysts. Along with each is its ticker, market capitalization, sector, and dividend yield.