Dividend stocks that will beat cash yields as Fed cuts rates, BofA says

The Federal Reserve could begin cutting rates as early as September — and income investors would do well to snap up dividend-paying stocks that offer solid yields. Fed funds futures pricing suggests a 100% likelihood that the central bank will ease on interest rates at next month’s meeting, according to CME FedWatch . Economists at Bank of America see the Fed dialing back its target rate – currently at a range of 5.25%-5.5% – to 3.25%-3.5% in mid-2026. This is likely to bring yields on money market funds, which are now sitting above 5% , crashing down. However, investors can continue generating portfolio income if they snap up the right dividend stocks. “A drop in money market yields could drive a shift in retiree assets into higher dividend yield stocks,” Bank of America equity and quant strategist Savita Subramanian wrote in a Thursday note. Subramanian’s team screened the S & P 500 for stocks that are expected to have dividend yields that are higher than the current 3-year Treasury note yield of roughly 3.9% over the next three years. Investors should be aware that there’s more to buying dividend payers than just shopping for the richest yields. High yields can be an indication that a company’s stock is on a sharp downward trajectory. Dividend yields that are too high may also raise the question of whether the company can sustain these payments to investors. Here are a few of the buy-rated names that Bank of America turned up. Data storage player Seagate Technology made the cut, with a three-year annualized dividend yield of 7.9%, according to Bank of America’s analysis. Bank of America analyst Wamsi Mohan reiterated his buy rating on the stock at the end of July following meetings with Seagate’s management. “We walked away bullish on the potential for this cycle to shape out with lower peaks and lower troughs (ultimately when demand slows),” Mohan wrote in a July 31 report. The analyst called out the potential for “slow and steady pricing increases” and gross margins that are above previous peaks in the meantime. “Company does not intend to chase share but rather focus on profitability,” Mohan wrote. Shares are up 11% in 2024, and the stock offers a dividend yield of 2.9%. STX YTD mountain Seagate Technology in 2024 Regional bank KeyCorp also came up on Bank of America’s list. The firm said KeyCorp’s three-year annualized dividend yield is 6.3%. Bank of America rates KeyCorp as a buy, and it sees the company and its peers benefiting as the Fed dials back its policy. “We believe gradual rate-cuts (25bp/quarter or every other meeting) should be manageable as far as the yield curve holds up,” analysts led by Ebrahim Poonawala wrote on July 11. “Potential that lower rates could stimulate loan demand (has been fairly muted) should also provide net interest income/margin defensibility.” Shares of KeyCorp are up about 1% in 2024, and the stock offers a dividend yield of 5.6%. KEY YTD mountain KeyCorp’s 2024 performance Finally, Devon Energy got the nod from Bank of America. Devon, which the bank rates as a buy, this week surpassed the Street’s estimates on core earnings per share in the second quarter, per FactSet. Oil production also hit an all-time high of 335,000 barrels a day, surpassing Devon’s own guidance. The stock is about flat in 2024, and its dividend yield is 4.4%. Other buy-rated names in Bank of America’s screen include Kraft Heinz , Merck and Simon Property Group .