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Income outlook: A surprising strategy

Key takeaways

  • Stocks of companies that pay dividends to their shareholders may be among the most compelling opportunities for income-seeking investors in the second half of 2024.
  • Energy, mining, and utility company stocks may offer both attractive prices and reliable dividend payments.
  • These stocks may be more attractive than other income-producing assets such as convertible bonds and preferred stocks in the rest of 2024.
  • Stocks may experience more volatility than other types of income investments, such as bonds.
  • Professional investment managers have the research resources and investment expertise necessary to help identify opportunities and manage the risks associated with dividend-paying stocks.

Why invest in dividend-paying stocks now

Dividend-paying stocks may be big winners in the second half of 2024.

If you’re seeking income from your portfolio, you’re likely to think of bonds, rather than stocks. But bonds and bond-like assets like preferred stocks or convertible bonds are not the only income-producing assets—and they also may not be the most attractive ones in the second half of 2024.

Adam Kramer manages Fidelity® Multi-­Asset Income Fund (FMSDX). He seeks income opportunities in a wide variety of places and he believes the most compelling ideas are now in dividend-paying stocks.

What are dividend-paying stocks?

Dividend-paying stocks are shares of common stock issued by companies that return a portion of their earnings to shareholders in the form of regular cash payments. These are often issued by well-established companies such as DHT Holdings (DHT), Agnico Eagle Mines (AEM), and Canadian Natural Resources (CNQ) in familiar industries such as banking, health care, and energy.

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Where are the opportunities in dividend-paying stocks?

Kramer likes dividend-paying stocks of utility companies, energy companies, and big US banks. He believes those are currently some of the best places to look because they offer both high dividends and relatively low share prices. "Energy and utilities still have a lot of bad news and negative sentiment around them that’s obscuring good news such as the opportunities created by growing electricity demand due to the rise of artificial intelligence,” he says. “I think those may be great ways to earn high, single-digit yields now while you wait for the stocks’ prices to rise.”

“A lot of the utilities are involved in feeding the grid for artificial intelligence. So all of a sudden they have a growth story that's not getting priced into their stocks and that makes the stocks look more attractive."

Kramer says stocks of master limited partnerships (MLPs) that own and operate oil and natural gas pipelines are another place where one can currently find attractive dividends and low prices. "In the past, master limited partnerships were shunned because everybody was down on energy pipelines and production, but we do need oil and gas,” he says.

Beyond MLPs, Kramer says he has found other stock ideas in energy, including oil tanker operators and Canadian oil sand companies. They have been reducing their capital spending and acquisitions and their free cash flow yield is expanding as a result.

Kramer has also seen opportunities in dividend-paying stocks from gold mining companies. “Mining companies have become much more reliable and transparent about how they allocate cash and manage their balance sheets so you can feel much more comfortable investing in them.”

Big US banks are another place where one can look for dividend income. “There has been a lot of bad news priced in about commercial property, particularly about the office building landlords that banks have made big loans to. Those things are bad, but I don't believe they're as bad as the market has suggested. Also, some big regional banks have actually raised a lot of money and buffered their balance sheets,” he says.

Why are dividend-paying stocks looking better than other investments right now?

Says Kramer, “Not so long ago, convertible bonds and preferred stocks issued by some of these same companies were more attractive than their stocks. But that’s no longer the case. They've either left the market or their prices have already risen to a point where they don’t represent compelling buying opportunities. But now, their stocks are available at relatively attractive prices. That’s because there’s a lot of good news about the economy and the fundamentals of many companies and industries that’s priced into the large-cap and growth stocks, but which hasn’t really lifted small- and mid-cap equities yet." 

Dividends and inflation

The persistence of inflation is another reason why dividend-paying stocks may be good ideas for the second half of 2024. Although inflation has come down over the past year, it remains higher than it has been during most of the past several decades. Unlike many bonds and other investments that pay a previously determined rate of interest to investors who own them, stocks’ dividends can—and often do—rise when inflation is high. Companies typically pay dividends each quarter and they often adjust them based on a variety of factors. "Companies that pay a sustainable and growing dividend have the potential to grow their income to keep up with inflation," says Kramer.

What to know about dividends

To be a successful dividend stock investor, you first need to understand several concepts. The first is dividend yield, which measures how much income the stock will produce. Dividend yield is a stock's annual dividend expressed as a percentage of its price. It's also important to understand that a stock's price and its dividend yield move in opposite directions as long as the dollar amount of the dividend doesn't change.

Would-be dividend investors should also know to look at the company's payout ratio. That refers to the amount of its net income or free cash flow that it pays in dividends. Low is usually good: A low ratio suggests the company may be able to sustain and possibly boost its payments in the future. "It's more about the stability of a company’s cash flows than about the level of payout. When the payout ratio is more than 50%, you always stress test that ratio," says Kramer. You can calculate dividend payout ratios using information from companies' income statements by dividing the company's dividends per share by its earnings per share.

Finding—and using—ideas

You can gain exposure to divided-paying shares in 3 primary ways:

1. Individual dividend-paying stocks. Check their dividend policy statement so you know how much to expect and when. Be sure to diversify to help manage risk if you want to build a portfolio of individual stocks.

2. Index funds and ETFs. Passive funds offer exposure to dividend stocks with low costs. Some strategies emphasize current income, others focus on dividend growth.

3. Actively managed funds. In today's markets, professional managers may be able to identify companies that are likely to increase their dividends and avoid those likely to cut them. Active management offers a similar advantage when looking to stay ahead of inflation.

Below are some examples of mutual funds and exchange-traded funds that use equity-income strategies and individual dividend-paying stocks as of June 5, 2024. You can run screens using the Mutual Fund Evaluator, ETF/ETP Screener, and Stock Screener on

Mutual funds

Fidelity® Multi-Asset Income Fund ()

Fidelity® Dividend Growth Fund ()

Fidelity® Equity Dividend Income Fund ()

Fidelity® Equity-Income Fund ()

Vanguard High Dividend Yield Index Fund Admiral ()

Columbia Dividend Opportunity Fund Class A ()

T. Rowe Price Dividend Growth Fund ()


Fidelity High Dividend ETF ()

Fidelity Dividend ETF for Rising Rates ()

Invesco S&P Ultra Dividend Revenue ()

ProShares S&P 500 Dividend Aristocrats ETF ()

Individual stocks

Vale SA ()

Permian Resources ()

Dominion Energy ()

Blue Owl Capital ()

Dow ()

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In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets. These risks are particularly significant for investments that focus on a single country or region.

High-yield/non-investment-grade bonds involve greater price volatility and risk of default than investment-grade bonds.

Preferred securities are subject to interest rate risk. (As interest rates rise, preferred securities prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Preferred securities also have credit and default risks for both issuers and counterparties, liquidity risk, and, if callable, call risk. Dividend or interest payments on preferred securities may be variable, be suspended or deferred by the issuer at any time, and missed or deferred payments may not be paid at a future date. If payments are suspended or deferred by the issuer, the deferred income may still be taxable. See your tax advisor for more details. Most preferred securities have call features that allow the issuer to redeem the securities at its discretion on specified dates, as well as upon the occurrence of certain events. Other early redemption provisions may exist, which could affect yield. Certain preferred securities are convertible into common stock of the issuer; therefore, their market prices can be sensitive to changes in the value of the issuer's common stock. Some preferred securities are perpetual, meaning they have no stated maturity date. In the case of preferred securities with a stated maturity date, the issuer may, under certain circumstances, extend this date at its discretion. Extension of maturity date will delay final repayment on the securities. Before investing, please read the prospectus, which may be located on the SEC's EDGAR system, to understand the terms, conditions, and specific features of the security.

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Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis. Investments in publicly traded MLPs involve risks and considerations that may differ from investments in common stock. Tax complexity risk: Master Limited Partnerships (MLPs) are generally considered pass-through entities for tax purposes and have special tax considerations. Pass-through entities may generate unrelated business taxable income (UBTI) that may have undesirable tax consequences for retirement accounts and other tax-exempt investors. If you hold MLP units, you are generally treated as a partner for tax purposes and will be issued a Schedule K-1 (Form 1065) rather than a Form 1099 form for use in filling out your tax return. A K-1 lists the partner's share of income, deductions, credits, and other tax items. If the MLP has operations in multiple states, you may need to file a separate tax return in each state. An MLP that is treated as a corporation in the United States rather than a pass-through entity for federal income tax purposes would be obligated to pay federal income tax on its income at the corporate tax rate. In this case, the amount of cash available for distribution by the MLP would be reduced and part or all of the distributions made could be taxed entirely as dividend income. In this case a Form 1099 would be furnished rather than a Schedule K-1. Please see the MLP’s website, SEC filings, or most recent shareholder report for further details about tax treatment of your investments. Legislative risk: The tax treatment of publicly traded MLPs could be subject to potential legislative, judicial, or administrative changes, possibly on a retroactive basis. Any such changes in tax treatment could negatively impact the value of an investment in an MLP. Concentration risk: Many MLPs are concentrated in the energy infrastructure sector. This narrow focus of MLPs may present considerably more risk than a diversified investment across numerous sectors of the economy. Market risk: MLPs may exhibit high volatility particularly during periods of economic stress or due to other events impacting the particular sector or industry in which an MLP operates. Interest rate risk: The market prices of MLPs are sensitive to changes in interest rates. As interest rates rise, the prices of MLP units may decline (and vice versa). Rising interest rates could also increase the MLP’s cost of capital which may limit potential growth through acquisition or expansion and reduce distribution growth rates. Distribution policy risk: All or a portion of an MLP’s distribution may consist of a return of capital from your original investment. MLP unit holders should not assume that the source of a distribution is net profit from the MLP’s operations. Liquidity risk: Despite the fact that MLPs are publicly traded, investments in MLPs may be relatively illiquid due to their unique investment strategy, asset concentration or other factors. Lack of liquidity can negatively impact your ability to sell MLP units. Additionally, should a secondary market exist, investors who need to sell MLP units may be subject to a significant loss. Commodity price risk: The price of MLP units may be negatively impacted by fluctuations in commodity prices. A significant decrease in the production or supply or sustained reduced demand for natural gas, oil, or other energy commodities would limit revenue and cash flows of MLPs and, therefore, the ability of MLPs to make distributions to unit holders. Regulatory risk: The assets of MLPs tend to be heavily regulated by federal and state governments. Changes in regulation can adversely impact an MLP’s profitability and therefore the value of MLP units. Conflicts of Interest: The general partners of an MLP typically have limited fiduciary duties to the MLP and may have conflicts of interest which could result in the general partners favoring its own interests over the MLP’s interests.

The gold industry can be significantly affected by international monetary and political developments such as currency devaluations or revaluations, central bank movements, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries.

Fluctuations in the price of gold often dramatically affect the profitability of companies in the gold sector.

Changes in the political or economic climate, especially in gold producing countries such as South Africa and the former Soviet Union, may have a direct impact on the price of gold worldwide.

The gold industry is extremely volatile, and investing directly in physical gold may not be appropriate for most investors.

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