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Now that 2023 is over, investors and analysts are watching dividend stocks in 2024. There are a lot of reasons to be bullish on dividend stocks and rather than miss out, investors can take this opportunity to explore some of the lesser known dividend stocks. These stocks not only offer impressive dividends, but also have upcoming catalysts which could lead to future growth in both their share price and dividend yields.
Dividend Stocks for 2024
When talking about dividend stocks, it would be a mistake not to consider REITs. A REIT is a real estate corporation that owns and manages real estate properties, earning at least 75% of its revenues from real estate-related activities.
To qualify as a REIT, companies must follow a certain set of rules; in return, they aren’t taxed at the corporate level. An example of those rules would be that REITs must distribute at least 90% of their taxable income back to shareholders as dividends, which is why REITs usually offer higher yields.
Over the past 12 to 18 months, the REITs market has been under intense pressure due to the Federal Reserve’s increasing interest rates, which led to a decline in real estate prices and an increase in REITs’ borrowing costs. But, when looking at the future, it’s likely that the Federal Reserve will begin cutting interest rates in 2024 which would improve the outlook for REITs.
One REIT that can benefit from the drop in interest rates is Armour Residential REIT (NYSE: ARR). A good opportunity ARR presents is that it faces very little credit risk, since its portfolio is comprise of nearly 99% agency-backed securities. As of December 2023, ARR offers an annual dividend yield of 25.13% which is extremely attractive.
However, it does face other risks. For starters, ARR leverages up to boost its earning power, which isn’t necessarily a bad thing but ARR is more leveraged than its industry peers. For example, ARR’s Total Debt-to-Equity ratio is around 930.72%, in contrast with similar leveraged companies in the industry like AGNC Investment Corp’s (NASDAQ: AGNC) 701.57% and Annaly Capital Management, Inc.’s (NYSE: NLY) 712.48%.
Less leverage is important for mortgage REITs since it gives them the opportunity to take on more debt later and purchase better-yielding or more attractive securities down the road. With higher leverage now, ARR is at a disadvantage which could lead to less flexibility.
In addition to these risks, ARR faces the normal risks associated with the industry such as prepayment risk. This risk comes with the premature return on a fixed-income security and when it happens investors must invest again at current market interest rates which are usually much lower. So, investing in this dividend stock is risky, but given the outlook for interest rates, it could yield a good profit in 2024 and beyond.
ARR stock is currently trading in a downward channel which has persisted for several years. ARR stock tested the upper trendline and pulled back
Another option for dividend investors which is fairly new but very interesting is Defiance Nasdaq 100 Enhanced Options Income ETF (NASDAQ: QQQY). This is the first put-write ETF using daily options bought and expiring on the same day. As of November 2023, the ETF offers a yield of 3.41% on its monthly dividends with a distribution rate of 60.52%.
Extremely risky, daily or zero-day options have very little time value because they will expire on the same day. Because of this, traders pay very little for the contract’s time value, trying to profit from a final move which could yield significant gains.
This is where QQQY enters in. This ETF aims to achieve consistent and exceptionally large monthly yield distributions using treasuries and Nasdaq-100 index options. Basically, its strategy is selling options at a premium on a daily basis; providing large monthly dividends to investors as well as exposure to the Nasdaq 100 Index.
This means the fund becomes more profitable when it successfully bets against zero-day options traders shooting for the moon, by selling overpriced, short-term options to collect premiums. This makes the fund a safe option for investors who want earnings from Nasdaq-100 stocks but without the risk. However, it comes at the price of QQQY’s 0.99% expense costs which is quite a bit higher than 2021’s average ETF expense cost of 0.16%.
AES Corporation (NYSE: AES) is another dividend stock that could benefit from the same catalysts as the REITs market. As a utility and power generation company, AES stock has been impacted by interest rate hikes because most companies that generate clean energy need to take on a lot of debt to finance infrastructure expansion. For example, solar and wind farms require a lot of capital for expansion so higher rates increased AES’ borrowing costs sharply. As a result, AES stock closed 2023 down roughly 32%.
But in 2024, dividend stocks like AES could benefit from not only a lower interest rate environment but the growing demand for clean energy in the US and globally. In 2022, the global renewable energy market reached $970 billion, and it’s expected to grow to $2 trillion by 2030. In the US, renewable energy has become the fastest-growing energy source with the renewable energy market already reaching a valuation of $269 billion.
AES is well-positioned to benefit from this growth, as it is the number one seller globally of clean energy to corporations through power purchase agreements in 2021 and 2022. It has also revealed plans to grow its portfolio of renewables by 25,000 – 30,000 megawatts by the end of 2027.
According to the AES’s Q3 results for 2023, demand is increasing for long-term contracts for renewables. In fact, the company signed new power purchase agreements worth 3.7 gigawatts and expects it will have sold 5 gigawatts worth by the end of 2023.
This is part of the company’s plans to enhance its renewables portfolio and sell its stakes in coal-fired power plants as it works towards its goal of exiting the majority of its coal assets by 2025. Other industry peers, like Consolidated Edison Inc., Entergy Corp, and NiSource Inc, also plan to exit coal by 2030 and expand their renewables portfolio.
Meanwhile, the US government is encouraging this shift after passing the Inflation Reduction Act in 2022. Demand for AES’s renewable products could increase thanks to the increases, extensions, or new tax credits for onshore and offshore wind, solar, storage, and hydrogen projects under the Inflation Reduction Act.
As the company grows its renewables portfolio and demand for renewables grows, AES’s outlook could continue to improve. As is, the company expects a 10% average annual growth of its rate base in the upcoming years, which is one of the highest rates in the entire utility sector.
The company has also exhibited consistent earnings growth over the last five years, with a 9% growth in adjusted EPS from $1.08 to $1.67 and a 6% growth in dividends from $0.48 to $0.632. Currently, its stock trades at around $17, offering an annual dividend yield of 3.99%.
The pharmaceutical company AbbVie (NYSE: ABBV)is a noteworthy dividend stock because it has been increasing its dividends for 51 consecutive years.
Aside from its attractive dividend yield of 3.97%, AbbVie caught the market’s attention when it announced that it would acquire ImmunoGen, a biotechnology company, and Cerevel Therapeutics, a biopharmaceutical company, for $10.1 billion and $8.7 billion respectively.
These acquisitions were not only a catalyst for the stock, but could also provide long-term benefits for AbbVie. For instance, ImmunoGen’s product, Elahere, is the first antibody-drug conjugate approved for treating platinum-resistant ovarian cancer.
Its sales reached over $212 million in the first nine months of 2023 and are expected to grow steadily. In a press release, AbbVie said that the acquisition will accelerate its entry into the market for treating solid tumors and stated that Elahere’s sales could take off in 2030 – especilly if its approved for larger segments of the ovarian cancer market.
As for Cerevel, the company doesn’t have an approved product yet. But, its lead candidate, Tavapadon, is currently being evaluated in a phase 3 study targeting Parkinson’s disease. Results from this study should be announced in 2024, and if it recieves FDA approval, it could be a tremendous asset for ABBV’s portfolio.
In fact, AbbVie announced that it acquired Cerevel to expand its neuroscience portfolio and make use of its late-stage asset Emraclidine, which has the potential to transform the standard of care in schizophrenia and other psychiatric conditions like Alzheimer’s disease. These acquisitions align with AbbVie’s long-term growth strategy and enable the company to capitalize on different segments of the pharmaceutical market.
These acquisitions come at an important time for the company which closed 2023 down 5% in part due to its top-selling drug, Humira, losing its patent protection and witnessing reduced sales amid increased competition. Since these two acquisitions aren’t expected to bring in profits for AbbVie until 2030, this dividend stock could be a good investment for patient investors who are looking for a blend of stable dividend income and growth potential.
ABBV stock is up almost 6% YTD and recently increased its dividend to $1.55, boosting its dividend yield above the industry average of 2.4%.
Cisco Systems (NASDAQ: CSCO) is a multinational technology conglomerate specializing in networking and communications technology, providing various products related to this sector. CSCO stock closed 2023 up roughly 6% after supply chain issues caused a 20% reduction in orders pushing the stock down to a 52 week low of $45. The company was forced to reduce its revenue projections for the 2024 fiscal year by about 6.6% due to this complication as well. However, these issues likely will not following the company into 2024 which is when its $28 billion acquisition of the software company Splunk is expected to take place.
Splunk specializes in analyzing data via AI in order to identify major issues in businesses and prevent them. Cisco plans to combine these tools with its own, to unlock greater value fro its clients.
As a result of this acquisition, Cisco is expected to become a significant player in the cybersecurity space, especially since its announced its new AI assistant for security. Trained on one of the largest security-focused data sets in the world, this AI aasistant analyzes more than 550 billion security events each day.
Another reason to be bullish on Cisco is its recently revealed forecasts for AI-related orders from its major cloud provider clients. According to these forecasts, it will increase its earnings by over $1 billion in the 2025 fiscal year. This strategic move into the AI sector could pay dividends for Cisco as the global AI market is expected to reach $2.5 trillion by 2032.
As for its dividends, Cisco’s dividends are stable with a yield of 3.22%. The company has an attractive track record for dividend investors since they have increased for 16 consecutive years. Capitalizing on the AI sector could lead to even greater growth in the years ahead, but Cisco is already a trusted brand producing essential products. This combination of stability and growth potential could make it an attractive investment for dividend investors.
The Bottom Line
There are a lot of dividend stocks with growth potential, but these five dividend stocks have catalysts in 2024 that could make their current prices a good buying opportunity for patient investors. Diversifying your portfolio and allocating small investments to dividend stocks like these could prove profitable as these companies recover or their industries grow.
Contrary to the commonly held belief that dividend stocks are a source of passive investment, you should always do your own due diligence to decide whether dividend stocks offer a good risk to reward for your investment horizon.
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