Money is flowing back into dividend stocks … be careful when you’re buying ETFs … one options for dividend investment ideas … a free Dividend Grader tool from Louis Navellier

Wednesday shifted the investment playing field.

As we covered here in the Digest, the Federal Reserve’s Dot Plot showed a median forecast of three quarter-point interest rate cuts in 2024. This was up from just one projected rate cut in the September Dot Plot.

Of the many ways that lower interest rates will impact the market, one is that they make dividend stocks appear more attractive. When rates drop, all those 5%+ savings accounts won’t be rewarding investors so handsomely. So, many investors will step out into the world of riskier assets in search of higher yielding investments – this is a tailwind for quality dividend payers.

This rotation is already happening.

As we’ve covered in our Wednesday Digest , Wall Street is a forward-looking pricing mechanism. It typically gazes out about 12 months into the future, trying to price stocks in anticipation of what’s coming.

Today, Wall Street is repricing a handful of assets/sectors that it expects will enjoy a tidal wave of investor dollars in the wake of the Wednesday Fed meeting. One of them is traditional dividend stocks.

For example, below, we look at SPHD which is the Invesco S&P 500 High Dividend Low Volatility ETF.

We’re looking at it over the past month. You can see how this high-dividend ETF responded to the Federal Reserve’s updated policy statement on Wednesday.

Now, we’re going to talk about dividend stocks in greater detail momentarily but let me deviate briefly.

When we talk about and/or suggest ETFs, it’s critical to look “beneath the hood,” before adding anything to your portfolio

Case in point, in researching this Digest, I came across the Alliance Bernstein U.S. High Dividend ETF, HIDV.

For an investor looking to rotate into high-yielding dividend stocks, this sounds like a great pick, right? How can you go wrong with that ticker?

Well, it turns out, these are top 10 holdings in HIDV:

• Apple
• Microsoft
• Alphabet
• Nvidia
• Amazon
• Broadcom
• Eli Lilly
• Adobe
• Meta
• QUALCOMM

These 10 stocks account for 32% of HIDV’s weighting. They’re all great companies, but are they really “high dividend” stocks?

See for yourself. Here are their respective annual dividend yields as I write.

• Apple – 0.49%
• Microsoft – 0.82%
• Alphabet – 0%
• Nvidia – 0.03%
• Amazon – 0%
• Broadcom – 1.88%
• Eli Lilly – 0.90%
• Adobe – 0%
• Meta – 0%
• QUALCOMM – 2.26%

It’s absurd that in an ETF positioned as “high dividend,” a full 40% of the top 10 holdings offer no dividend yield whatsoever.

This is basically just an index fund – except you have the privilege of paying an expense ratio of 0.34% to own it.

So, what’s a better way to find quality, high dividend yield stocks?

Well, same advice as before – look under the hood.

A look at SPHD offers us far more single stock investment ideas

Here are the top 10 holdings of SPHD and their respective annual dividend yields as I write:

• AT&T – 6.64%
• Altria – 9.17%
• Verizon – 7.05%
• International Paper – 4.86%
• Kinder Morgan – 6.35%
• Oneok – 5.53%
• LyondellBasell – 5.27%
• Prudential Financial – 4.72%
• Simon Property Group – 5.21%
• 3M Company – 5.58%

And if we look at SPHD from a 30,000-foot perspective, we see that its top sector exposure is what we’d expect if we were snooping around for lofty dividends…

• Utilities
• Real Estate
• Consumer Staples
• Materials
• Energy
• Health Care

Now, just because we’ve zeroed in on stocks that are paying higher dividend yields doesn’t automatically mean they’re all “buys” for our portfolio.

After all, some companies that pay extravagant dividends find themselves unable to continue funding those dividend payments. They’re forced to slash them, which often results in income investors fleeing, sending the price of that dividend stock plummeting.

A ratio that helps us address this concern is the “Dividend Coverage Ratio.” It measures the number of times a company can pay dividends to its shareholders by comparing a company’s net income and the dividend paid to shareholders.

We can also analyze basic operational health. Is a company generating increases revenues and profits, or are margins collapsing as headwinds mount?

Unfortunately, this sort of quantitative analysis can require loads of time. So, let me point you toward a free tool that can provides fantastic dividend analysis instantly.

An easy way to get Louis Navellier’s thumbs-up or thumbs-down on a dividend stock

For newer Digest, readers, Louis is one of the early pioneers of using predictive algorithms to scour the markets for quantitatively strong stocks. Forbes even named him the “King of Quants.”

As a quantitative investor, he has strict investment rules that are rooted in cold, impartial numbers. When these rules trigger a buy, he buys. When they trigger a sell, he sells. It’s pretty simple.

Louis also has strict investment rules for the dividend stocks he recommends. Fortunately for you and me, he’s codified his dividend analysis approach into a free tool that we can access called the Dividend Grader.

Let’s circle back to SPHD’s top 10 holdings and pick a handful of them to run through this free tool.

Here’s what we find:

Clearly, there’s a wide range of attractiveness among these dividend payers.

LyondellBasell comes in with a “Strong Buy” grading, while AT&T, 3M, Altria, and International Paper are all “Sells.”

With this information, we’re in far better position to add quality, high-yielding dividend stocks to our portfolios without sacrificing fundamental strength that can lead to capital losses. After all, that 7% dividend yield becomes much less attractive if the stock collapses 30% while you hold it.

By the way, if you’d like Louis’ help in finding the best high-yielding dividend stocks, I’d point you toward his Growth Investor service where he has an entire portfolio named “Elite Dividend Payers.” You can learn more here.

High yielding dividend stocks are just one part of the market that’s poised to jump as the Fed eyes 2024 rate cuts

If you’re looking for more ideas, we have you covered.

Earlier this week, Louis sat down with our other InvestorPlace experts Eric Fry and Luke Lango to discuss “all things 2024” in their Early Warning Summit 2024 event.

They delved into inflation… when will the Fed will cut rates… the impact on the economy… recession risk… the impact of the presidential election on stocks… which sectors are poised for outperformance… artificial intelligence… which trends will see the greatest flood of dollars… the corners of the market to avoid next year…

It was a fantastic evening with loads of actionable market commentary. Our experts even gave away the names of three stocks they believe are positioned to soar in 2024, no strings attached. To check out the replay of Tuesday’s Early Warning Summit 2024, just click here.

Coming full circle, with the Fed now signaling an increasing number of rate cuts next year, Wall Street is repricing all sorts of sectors and assets – let’s take advantage.

Have a good evening,

Jeff Remsburg