Boost returns with ‘the magnificent others,’ AllianceBernstein says

Investors seeking to boost returns in their 60/40 portfolio should look to what AllianceBernstein calls “the magnificent others.” The firm thinks the traditional balance of 60% stocks and 40% bonds makes sense for investors, with the Federal Reserve expected to start cutting interest rates later this year, setting the table for a soft landing. The strategy underperformed the broader market in 2023: the S & P 500 surging more than 24%, while the iShares Core Growth Allocation ETF (AOR) , which mimics a 60/40 allocation, advanced nearly 13%. While investors have been focused on “Magnificent Seven” Big Tech in the equity part of their portfolio, there are other names that are attractive — and they come with the added bonus of dividends, said Walt Czaicki, senior investment strategist at AllianceBernstein. “If you’re finding companies that are giving you dividend growth rates of anywhere say from 10% to 12%, well north of inflation, that has a nice compounding effect,” he said. “If you happen to get stock price appreciation along the way, from a total return perspective, that’s a good combination.” What makes these dividend-paying stocks appealing is that free cash flow is expected to grow roughly 7% over the next five to six years, he said. Plus, valuations are compelling, the strategist added. “That is something you would want to take advantage of now, especially if fed funds rates go down and money market rates go down,” Czaicki said. “As free cash flow goes up, as an investor, you can take advantage of the possibility of a rising stream of income in the form of rising dividends because free cash flow is forecast to grow well beyond where fed funds rates are expected to be, say, in the next two to three years.” However, investors should not just buy a stock based on its dividend yield. In fact, those with very high yields may not be able to sustain them, said Czaicki. Instead, investors should focus on companies that have free cash flow, a strong balance sheet and are competitively positioned, he said. “That all equals that sustainability of the dividend remaining intact and growing over time,” he said. These are the top 10 holdings in the AllianceBernstein Equity Income Fund (AUIYX) , as of May 31. It has an expense ratio of 0.73%, and the fund has posted a total return of 11.22% in 2024. Within dividend-paying names, Czaicki sees three specific areas of opportunity: energy transition and security, supply chain security, and national defense and cybersecurity. “Those are areas where we’re finding growth within value,” he said. For instance, there is a tremendous amount of underinvestment in energy systems around the world, some of which are 150 years old, he said. There is also expected to be growth in supply chain security as companies move back to their home country, known as onshoring, or in a neighboring country, known as nearshoring, he said. On the sector level, he likes energy, industrials and utilities. “They’re not all created equal,” Czaicki said. “This is why you want to be active. You need to be selective in these areas.”