This dividend strategy is swapping out chip stock winner for Starbucks

Dividend-focused investors should look to switch out a hot chip stock for a slumping consumer play after the latest market rally, according to Morgan Stanley Wealth Management. Daniel Skelly, a senior investment strategist, said in a note to clients Thursday that the firm was making a change to its dividend equity portfolio. Coffee chain Starbucks is joining the model portfolio, while red-hot Broadcom is on the way out. Starbucks has been battling rising labor costs in the U.S. and weak demand in China, a key international market. The stock is down 7% over the past year. SBUX 1Y mountain Shares of Starbucks have struggled over the past year. But Skelly said the market does not appreciate the growth potential for the coffee chain. “SBUX has been a battle ground stock in the post-COVID economy as concerns surrounding same store sales and international growth potential have weighed on sentiment. We believe both are overstated and risk/reward skews positive, given valuation that remains at the bottom of its 10-year range,” Skelly said. The addition of Starbucks helps bolster the consumer discretionary part of the Morgan Stanley Wealth Management model portfolio. Home Depot is the only other current component in that category. Starbucks could be more stable than its peers, Skelly said. “Additionally, we view the company as relatively well insulated in the consumer space given its exposure to the coffee category which is habitual and likely less exposed to changes in consumer preferences/diet,” the note said. Starbucks has a dividend yield of 2.3%. Companies with growth concerns and struggling stocks can sometimes consider cutting their dividend, but new CEO Laxman Narasimhan said at a Morgan Stanley conference in December that there are no plans to change the dividend strategy. “We actually have a history over the years of maintaining a 50% dividend payout ratio. We intend to sustain that,” Narasimhan said. Meanwhile, Broadcom’s rally has put its valuation at a level that was hard for Skelly’s team to stomach. The stock is already up more than 16% year to date and popular among active traders. “Notably, current valuation is ~60% above its 10-year average (14x), and AVGO is a consensus overweight; active portfolio concentration from institutions is as high as it’s been since 2018 per MS & Co.,” the note said. That rally has also made its payouts less attractive for new investments. The dividend yield for AVGO is 1.6% even after the company announced a dividend hike in December. — CNBC’s Michael Bloom contributed reporting.