Now may be a good time to start buying high-yielding stocks, according to BMO Capital Markets. The top dividend-paying stocks in the S&P 500 have underperformed the index over the past year and a half, even as they have enjoyed a recovery in recent months, said Brian Belsky, chief investment strategist. Higher interest rates have weighed on the group for a longer period since investors found attractive yields in the bond market. Those yields are expected to start falling as the Federal Reserve begins to cut rates. The market is pricing in a 100% chance of a rate cut at the central bank’s September meeting, according to the CME FedWatch tool based on bets from traders. “The relationship between these stocks and interest rates has been misunderstood in recent years, and their significant underperformance is likely an overreaction by investors,” Belsky wrote in a July 30 note. “But with the Fed now likely to cut rates sooner than previously expected, the potential decline in longer-dated yields in response should provide a boost, nonetheless.” BMO’s analysis of historical trends also shows that this type of underperformance is typically followed by “an impressive rebound,” he added. Moreover, the severity of the underperformance seems out of step with the group’s fundamentals, Belsky noted. Here are some of the high-paying names on BMO’s buy list. The firm’s analysts rate them as outperformers and are in the top 25% of S&P 500 stocks by dividend yield. Two drugmakers are among those BMO believes will outperform. Pfizer Inc.’s yield is 5.73%, up about 2% year-to-date, as of Tuesday’s close. The drug giant’s second-quarter revenue and adjusted earnings easily beat expectations last week. The company, which has benefited from a cost-cutting program and stronger-than-expected sales of its antiviral Covid pill, also raised its full-year outlook. Pfizer is also developing a daily version of its weight-loss pill. In July, the company said it had seen “encouraging” data in an early-stage study and plans to conduct more early-stage trials in the second half of the year. Meanwhile, AbbVie shares have a 3.34% dividend yield and are up about 20% year to date. With Humira now battling generic competition, AbbVie has been looking to expand its pipeline. Last week, it closed its $8.7 billion acquisition of Cerevel Therapeutics, which has a number of drugs in its pipeline to treat neurological and psychiatric conditions. In February, AbbVie completed its $10 billion acquisition of ImmunoGen, which develops cancer drugs. Utilities on the list include American Electric Power and Southern Company. The former has a 3.58% dividend yield, while the latter has a 3.33% yield. Utilities have been one of the best-performing sectors in the S&P 500 this year thanks to anticipated demand for electricity to power AI data centers. The sector is up about 16% year to date. Meanwhile, American Electric Power shares are up 21% year to date, while Southern shares are up more than 23%. On the other hand, real estate has been one of the S&P’s worst performing sectors since the start of the year, up 4% compared with the S&P’s gain of about 16%. Bank of Montreal has been bullish on REITs and believes the sector is poised for a turnaround. Two names on its list are Digital Realty Trust and Host Hotels & Resorts. Digital Realty Trust, which pays a 3.28% dividend yield, owns, develops and operates data centers — which are expected to see increased demand thanks to artificial intelligence. Last week, the company reported second-quarter core funds from operations that beat estimates, while its revenue missed expectations. Shares are up about 10% year-to-date. Host Hotels & Resorts, which owns luxury and upscale hotels, has a 4.92% dividend yield and has fallen 16% so far this year. The company’s second-quarter funds from operations came in slightly above estimates last week, and its revenue was in line with expectations. However, the company lowered its full-year guidance for funds from operations and adjusted earnings before interest, taxes, depreciation and amortization.
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Bank of Montreal says these high-yielding stocks could see a rebound as interest rates fall
