Jefferies expects strong dividend growth this year. Here’s how to play it

It should be a good year for dividends, according to Jefferies. This year, the firm expects dividend growth in the United States to accelerate to 6.2% from 3.9% in 2023. “Most sectors except for energy and autos are expected to grow dividends, led by media and semis,” Desh Peramunetilleke, the firm’s global head of quantitative strategy, wrote in a note Wednesday. Over the past two decades, stock buybacks have become the main way companies return cash to shareholders. Still, dividends have remained key, with reinvested dividends making up about 43% of the total returns for the MSCI USA index since 2001, he said. Now, “the higher cost of debt is translating to lower buybacks,” he said. The slower pace of stock repurchases has boosted the free-cash-flow cover for U.S. companies for dividends and buybacks to well above 1x, he noted. “[The] US can grow dividends again, without impacting the FCF cover,” Peramunetilleke said. Right now, he believes one of the best ways to play that dividend growth is through high-quality-yield stocks. “Currently, most macro indicators such as falling inflation expectation, slowing economic growth and falling commodity prices suggest a move towards HQY,” he said. Jefferies defines HQY, or high-quality yield, as top-two-quintile high-quality U.S. companies with a market cap of more than $5 billion. Their 12-month forward dividend yield is above the regional median and they are highly profitable, with their next two-year return on equity and last 12 months return-on-investment capital greater than 10%. Here are some of the names that made the cut. Broadcom is the largest market-cap name on the list and has a 1.6% 12-month forward dividend yield. Last week, the semiconductor company reported a revenue and earnings beat for its fiscal first quarter and full-year revenue guidance in line with analysts’ expectations. In December, Broadcom boosted its dividend by 14% to $5.25 per share. The stock is loved by Wall Street, with an average analyst rating of overweight and 21% upside to the average price target, according to FactSet. Shares are up nearly 13% so far this year, after nearly doubling in 2023. Meanwhile, shares of Procter & Gamble are up 10% year to date. The branded consumer packaged goods company has a 12-month forward dividend yield of 2.5%. In January, Procter & Gamble reported mixed fiscal second-quarter earnings and revenue, with adjusted earnings per share topping estimates and revenue falling short of expectations. Its last dividend increase was in April when the company boosted its payout by 3%. Owners of Enterprise Products Partners ‘ stock are rewarded with a 12-month forward dividend yield of 7.6%. The master limited partnership provides midstream energy services. In January, it announced a 5.1% dividend increase to 51.5 cents per share from 50 cents. The stock also has an average rating of overweight and has nearly 12% upside to the average price target, according to FactSet. The stock is up about 11% year to date, after gaining 9.25% in 2023. Lastly, Darden Restaurants has a 3.3% 12-month forward dividend yield and is up 4.5% so far this year. In 2023, it added nearly 19%. The average rating on Darden’s stock is overweight. It has 4% upside to the average price target, per FactSet. The restaurant group is expected to report its fiscal third-quarter financial results next week. In December, its fiscal second-quarter earnings topped expectations , although its revenue fell short. However, Darden also raised its full-year earnings guidance. In June, the company boosted its dividend by 8% to $1.31 per share from $1.21.