Impact of Fed Rate Cuts on Dividend Stocks

Historical performance of dividend stocks during rate cuts

Dividend stocks have historically shown resilience during economic downturns, as exemplified by ExxonMobil's commitment to maintaining dividends even in challenging times. Companies like Coca-Cola and Procter & Gamble continue to prioritize shareholder returns, indicating a trend of stability in dividend payments during Fed rate cuts.

"We remain committed to paying dividends through the very lows of the commodity price cycles, like we did in 2020 during the depths of the pandemic, when some of our peers cut dividends." --- (XOM, event transcript, 2024/05/29)

"Dividends During the three months ended March 29, 2024 and March 31, 2023, the Company paid dividends of $99 million and $101 million, respectively." --- (KO, sec filing, 2024/Q1)

"We expect adjusted free cash flow productivity of 90%, and we expect to pay more than $9 billion in dividends to repurchase $5 billion to $6 billion in common stock, combined a plan to return $14 billion to $15 billion of cash to share owners for the year." --- (PG, earning call, 2024/Q1)

"In April 2024, our BOD declared a dividend of $0.42 per share, payable on June 14, 2024, to shareholders of record at the close of business on May 10, 2024." --- (PFE, sec filing, 2024/Q1)

"We've grown our annual dividend for 41 consecutive years. And now that that acquisition has closed, we increased our go forward share repurchase program to a $20,000,000,000 a year pace." --- (XOM, event transcript, 2024/05/29)

Investor sentiment and corporate strategies in low-rate environments

In low-rate environments, companies like AT&T and Verizon focus on sustainable growth and cash flow to maintain dividends, while Walmart emphasizes proactive investments to avoid future shortfalls. This reflects a broader corporate strategy prioritizing efficiency and long-term returns, shaping investor sentiment towards dividend stocks.

"We continue to believe we can, 1, grow sales because we're positioned to serve people however they want to shop 2, grow profit faster than sales while delivering low prices and investing in our associates due to our improving business mix and 3, improve our return on investment as we grow profit and make capital investments in the right areas." --- (WMT, event transcript, 2024/06/05)

"By executing on a simple playbook, the company is achieving steady customer growth, improving returns and enabling additional investments that are benefiting the business. AT&T's simple and consistent go-to-market approach continues to resonate with customers and has created a sustainable model for healthy growth and strong cash conversion. AT&T remains focused on growing durable relationships with high-quality 5G & fiber customers." --- (T, press release, 2024/06/10)

"Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions." --- (VZ, sec filing, 2024/Q2)

"And we are very convicted that the best use of this cash for customers and the business and shareholders right now is investing in the businesses in which we're pursuing." --- (AMZN, event transcript, 2024/05/22)

"John David Rainey: I would add, when we think about some of the investments in our business, whether it be capital investments or even price investments or investments in our associates, we don't want to find ourselves in a place 2, 3, 5 years from now where we have to catch up." --- (WMT, event transcript, 2024/06/07)

Comparison of dividend stocks vs. fixed-income investments

Dividend stocks like Chevron, IBM, and Coca-Cola demonstrate strong cash returns through substantial dividend payments, highlighting their appeal compared to fixed-income investments. However, the lack of direct comparisons to fixed-income yields limits insights into their relative attractiveness amid Fed rate cuts.

"Dividends The company paid dividends of $3.0 billion to common stockholders during the first three months of 2024." --- (CVX, sec filing, 2024/Q1)

"Equity Total equity increased $720 million from December 31, 2023, primarily driven by an increase from net income of $1,605 million and common stock of $502 million; partially offset by dividends paid of $1,522 million." --- (IBM, sec filing, 2024/Q1)

"We're committed to investing to drive growth and to support our dividend, which we have raised for 62 consecutive years." --- (KO, earning call, 2024/Q1)

"So -- but of course, if we see opportunities to gain more revenue and grow business, we will always look into the business side. Secondly, the dividend is very important." --- (VZ, earning call, 2024/Q1)

"We paid dividends on common and preferred shares of $4,133 during the first six months of 2024, compared with $4,097 for the first six months of 2023." --- (T, sec filing, 2024/Q2)

Future outlook on interest rates and dividend stocks

The future outlook for dividend stocks appears positive, as major financial institutions like Morgan Stanley and Goldman Sachs are increasing their dividends, likely in response to favorable interest rate conditions. Additionally, rising government bond yields suggest a shifting interest rate environment that could further influence dividend policies.

"Morgan Stanley (NYSE:MS) announced that it will increase its quarterly common stock dividend to $0.925 per share from the current $0.85 per share, beginning with the common stock dividend expected to be declared by the Firm's Board of Directors in the third quarter of 2024." --- (MS, press release, 2024/06/28)

"The Board approved an increase in our quarterly common stock dividend from $2.75 to $3.00 per share beginning in the third quarter of 2024." --- (GS, sec filing, 2024/Q2)

"That can be through increasing our dividend, which generally rises alongside earnings. That can be by redeeming outstanding preferreds to create additional dry powder for the future, especially preferreds that might be or might become relatively expensive." --- (SCHW, event transcript, 2024/07/16)

"On June 28, 2024, the Firm announced that its Board of Directors intends to increase the quarterly common stock dividend to $1.25 per share (up from the current $1.15 per share) for the third quarter of 2024." --- (JPM, sec filing, 2024/Q2)

"In interest rates, the yields on 10-year U.S. and U.K. government bonds increased during the quarter." --- (GS, sec filing, 2024/Q2)

Impact of Fed rate cuts on dividend growth rates

Fed rate cuts can adversely affect dividend growth rates by influencing earnings and cash flows. Companies like Procter & Gamble highlight risks from external economic factors, while Disney emphasizes managing interest rate exposure to mitigate volatility's impact on dividends.

"As a result, the residual growth rates could be adversely impacted by a sustained deceleration in category growth, grooming habit changes, devaluation of currencies against the U.S. dollar or an increased competitive environment." --- (PG, sec filing, 2024/Q4)

"Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs." --- (DIS, sec filing, 2024/Q2)