Bank of America sees opportunity in dividend stocks. Here are a few names it's highlighting

Published Fri, Mar 22 20242:05 PM EDTUpdated Fri, Mar 22 20243:58 PM EDT

Select dividend stocks could help boost investors' portfolio returns as the U.S. economy continues to improve, according to Bank of America. The bank's U.S. regime indicator showed improvement for the second month in February, confirming the economy is in a recovery phase, equity and quant strategist Savita Subramanian wrote in a note last week. During this period, which has lasted eight months on average in the past, dividend-paying stocks are among those that have fared well, she said. "We believe that we are now in a total return world in which the contribution of dividends to total market returns could be significantly higher than it was in the last decade, a period marked by falling cash yields and lofty price returns," Subramanian said. At the same time, the equal-weighted S & P 500 has outperformed its cap-weighted counterpart 78% of the time, and by 7.2 percentage points on average, she noted. "Our preference for income and better breadth are also supported by an earnings catch up story … as well as Fed cuts (assuming they happen as expected), pushing retiree cash into higher dividend yielding equities," she said. Investors should seek out companies with above-market dividend yields that are secure, not stretched, Subramanian advised. For those characteristics, she looks to quintile two of the Russell 1000 by trailing dividend yield. This includes the second-highest tranche of dividend yielders in the index. Her screen also guards against owning distressed companies that might move into the first quintile, the highest dividend yield group, if prices fall ahead of dividend cuts. "Quintile 2 also incorporates a 'buy low, sell high' valuation discipline in that if prices rise faster than dividends grow, companies will migrate into Quintile 3," she noted. Here are some of the names on the list. Among the energy names on the list is Chevron , which has a 4.2% dividend yield. The company paid out a record amount of cash to shareholders last year, doling out $11.3 billion in dividends and buying back $14.9 billion in shares. Last month, the oil giant announced it would hike its quarterly dividend by 8%. "Almost 10% of our market capitalization was returned to shareholders last year," Chevron CEO Michael Wirth said in an interview with CNBC's " Squawk on the Street " on Feb. 2. The stock has an average rating of overweight and 14% upside to the average analyst price target, according to FactSet. Shares are up nearly 4% year to date. Several utilities stocks are also on the list, including American Electric Power and Consolidated Edison . The sector has underperformed the market this year, with the Utilities Select Sector SPDR Fund (XLU) gaining just shy of 1% year to date. In comparison, the S & P 500 is up about 10% so far in 2024. American Electric Power, which has a 4.3% dividend yield, has an average analyst rating of overweight and about 4% upside to the average price target, per FactSet. On the other hand, Consolidated Edison, which yields 3.7%, has an average rating of hold and almost 2% upside to the average price target. American Electric Power has moved nearly 2% higher so far this year, while Consolidated Edison has lost 2.6% year to date. Meanwhile, with Fifth Third Bancorp , investors can enjoy a 3.8% dividend yield. The stock, which took a hit after last March's regional banking crisis, is up nearly 41% from a year ago. FITB 1Y mountain Fifth Third Bancorp one-year performance Fifth Third Bancorp has an average analyst rating of overweight and an average price target of $39.09, suggesting about 7% upside, according to FactSet. Shares are up more than 5% year to date. Lastly, Essex Property and Park Hotels & Resorts are two real estate investment trusts on the list. Essex Property has a 4.1% dividend yield and is down 2.7% year to date. It has an average rating of hold. Park Hotels & Resorts, on the other hand, has rallied 15% so far this year and hit a 52-week high on Friday. The REIT, which yields 4%, has an average analyst rating of overweight and 11% upside to the average price target, according to FactSet.