One group of stocks that will shine a bit brighter during the Federal Reserve’s interest rate cutting cycle is the payers of hearty dividends. We have a handful of them in the Club’s portfolio, led by Best Buy . The cycle is all but guaranteed to begin Wednesday with a traditional quarter percentage point reduction or perhaps a larger half-point move . Under either scenario, dividend-paying stocks stand to gain because their quarterly payouts will start to look relatively more attractive than competing options for income-seeking investors. That includes U.S. government bonds and even money market funds and certificate of deposits. In general, the effect may be most apparent in stocks with substantial and safe dividend yields. Considering the benchmark 10-year Treasury note is about 3.64% Tuesday, yields in the 3% ballpark would qualify as plenty substantial. Basically, we’re not talking about Danaher and its 0.39% yield. There are reasons to like Danaher — including cheaper funding for its biotech customers and an improved initial public offering market — but its dividend isn’t one of them. And by safe, the focus is on companies with solid balance sheets and cash flows to support the dividend . The five Club stocks with the biggest dividend yields fit the bill: Best Buy, Morgan Stanley , Coterra Energy , Stanley Black & Decker and Wells Fargo . In addition, all five are trading at a price-to-earnings ratio on 2025 estimates that are below the S & P 500’s 20.3 multiple. Of course, it’s too simplistic to say these five stocks with robust dividends will go up as interest rates fall. Many factors go into stock performance, such as the health of the U.S. economy and management execution. In the case of Coterra, its stock price is subject to the whims of commodity markets. Still, it’s worth zooming in on this chunk of the portfolio heading into the Fed’s expected first rate cut because their dividends represent a potential tailwind outside of their underlying fundamentals. Best Buy, Stanley Black & Decker and Wells Fargo are the best positioned of the five top-yielding Club stocks. A common thread linking Best Buy and Stanley Black & Decker is their exposure to the housing industry, which should see increased activity due to lower interest rates. The Fed’s hiking campaign, which began in March 2022 and eventually brought rates to their highest levels in more than two decades, led to higher mortgage rates and less activity across the housing landscape. The reverse should be true as rates go lower. Best Buy “is the kind of stock that can fly not just because of its 3.8% yield, which really works when the Fed is cutting, but also because it sells a lot of big white goods [such as refrigerators] that do terrifically when the Fed lowers rates historically,” Jim Cramer said during the Club’s September Monthly Meeting last week. Stanley Black & Decker tools are needed to build new homes are fix existing ones. “The earnings are going to go up once the Fed starts cutting,” Jim said, adding that he wants to see a few rate reductions before looking to book profits in the stock. It’s up more than 25% since the start of July. BBY WFC,SWK YTD mountain Best Buy’s year-to-date stock performance. Wells Fargo, meanwhile, has been wobbly in recent days after a JPMorgan executive’s comments on the firm’s interest income outlook spooked bank investors, and then regulators hit Wells with an enforcement action on anti-money laundering controls . We still like the stock . “I think CEO Charlie Scharf has a winning formula for when rates go down. Call me a buyer not a seller down here, especially with that juicy yield,” Jim said last week, though our strategy this close to the Fed’s announcement is to wait for the decision before making a move. Our view on Coterra and Morgan Stanley are more subdued. Coterra has been a difficult stock to own for reasons outside of its control: Oil and natural gas prices have trended down over the past year, and there are no obvious catalysts to spark a reversal. U.S. oil benchmark West Texas Intermediate crude is hovering below $72 a barrel Tuesday, compared with above $91 at this time in 2023. Natural gas is trading below year-ago prices, even though it’s off the depressed levels seen between February and late April. The challenge for Morgan Stanley is that its wealth management business has effectively become an anchor on its investment banking business, which is recovering from a freeze brought on by the Fed’s rate hikes. “Morgan Stanley is now in no man’s land: Too low to sell, too high to buy,” Jim said. “That means wait, which is exactly what we’re doing.” (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Customers look at appliances for sale at a Best Buy store in Miami, Florida, Oct. 8, 2021.
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One group of stocks that will shine a bit brighter during the Federal Reserve’s interest rate cutting cycle is the payers of hearty dividends. We have a handful of them in the Club’s portfolio, led by Best Buy.