The case for dividend stocks now

Investing is always an exercise in braving uncertainty. The current moment is no exception—with stock investors facing a host of uncertainties on the economy, inflation, interest rates, and global affairs:

• A soft landing for the US economy seems likely, but historically a slowdown without recession has been a rarity.
• While headline inflation has fallen significantly from its 2022 peak, core inflation has remained sticky.
• Regulations, trade policy, taxes, and more could be changing under the new administration and new makeup of Congress poised to take office in 2025.
• Conflicts and other crises around the world could rattle markets at any moment.

Investors looking to navigate all this uncertainty may understandably be concerned about protecting themselves from downside risk. At the same time, historically markets have often climbed a wall of worry and gone on to rise despite uncertainty. For that reason, even risk-shy investors may want to think twice before giving up on the growth potential of stocks.

For some investors, high-quality dividend-paying stocks might offer a sort of sweet spot—offering the chance to participate in upside potential, while providing a degree of protection against market volatility.

The case for quality dividend-paying stocks

Periods of profound uncertainty can be unsettling—but historically they've been bad times to sell out of stocks.

In fact, historically the market has often outperformed following periods of above-average uncertainty,¹ according to research by Denise Chisholm, director of quantitative market strategy for Fidelity. "If it seems rational and prudent to wait on the sidelines for some certainty, history illustrates that looks like the riskier proposition," says Chisholm. "Historically the higher the starting point of uncertainty, the better the forward returns are likely to be."

Investors who want to dial back their risk level but not give up on growth potential could consider high-quality dividend-paying companies. Those kinds of stocks appeal to Ramona Persaud, manager of Fidelity^® Equity-Income Fund () and Fidelity^® Global Equity Income Fund (). She has typically favored shares of high-quality companies that offer reasonable valuations and compelling dividends.

Persaud notes that falling interest rates can provide a beneficial backdrop for dividend stocks, as a stock's dividend yield may become relatively more competitive if yields on bonds decline. She adds that declining interest rates may support gains across a broader range of stocks—a significant change from much of the past 2 years, when market gains have been primarily concentrated among a handful of mega-cap growth shares.

"I'm excited that really good companies may get more credit from investors than they have during the wave of glamour stocks," she says. "And investors stand to gain from the stocks' dividend payments."

An appropriate mix of safety and growth potential

Persaud focuses on stocks that offer high quality in the form of strong balance sheets, high potential return on investment, and predictable cash flows. She cares about what she pays for that quality too, so she looks for attractive valuation relative to peers and the stock's own history. Finally, she looks for appealing dividend yields compared to similar stocks and the market as a whole. Focusing on this mix of quality, valuation, and income has historically helped the fund navigate both up and down markets, she says.

"Ideally, I look for a stock that has a combination of these factors. I can't always get all 3, so I look for a good balance of them." Persaud says. For example, if the market has already recognized a stock's high quality by awarding it a higher valuation, she has often tailored her position size to reflect this. "If I can get higher quality at a cheaper price, and the company pays a compelling dividend, that's when a stock is really interesting to me."

Where she's found potential opportunity

Because she focuses on a bottom-up analysis of companies and securities, Persaud says she's found potential opportunity across a range of sectors and themes. The following are recent portfolio holdings that have illustrated the mix of attributes she typically looks for.

JPMorgan Chase ()

Because the financial sector is cyclical, meaning it tends to rise and fall with the broader economy, Persaud says she's particularly uncompromising on quality when investing in the sector. She believes that JPMorgan has established itself as one of the highest quality US banks coming out of the global financial crisis more than a decade ago. That level of quality has often been reflected in the company's valuation, a consideration that Persaud says she has taken into account with position size. "The market believes it's one of the winners," she says. Still, the stock's dividend has often been competitive—recently offering a dividend yield 50% higher than the average among S&P 500^® companies. Says Persaud: "JPMorgan has offered good vision, strategy, and execution, plus a lot of excess yield."

Microsoft ()

Persaud says that Microsoft has often ranked competitively against other benchmark companies on quality metrics such as return on investment and earnings and price volatility. While its dividend yield has often been low relative to the broader market, it's tended to be high for the tech sector, which has the lowest average yield of any sector in the S&P. Says Persaud: "Holding shares of high-quality tech companies with appealing dividend payments can help maintain a diversified portfolio while managing downside risk."

Taiwan Semiconductor ()

The semiconductor industry is highly cyclical: The companies often flourish when chips are in high demand, then struggle when demand falls or when there is oversupply. Persaud likes to use the industry's down periods to invest in leaders like Taiwan Semiconductor, in order to benefit from any eventual rebound in their businesses. She notes that although semiconductor companies have struggled in recent years, Taiwan Semiconductor has used the challenging environment to widen its lead over its main competitors. What's more, the stock has often paid a dividend yield much higher than the typical tech stock. Says Persaud: "Downturns in cyclical industries can frighten away investors. At those times it can be possible to invest in high-quality companies with good dividend yields when they are relatively cheap."

Finding investing ideas amid uncertainty

Persaud suggests investors wary of the market in the current uncertain environment embrace moderation. "I strive to build a portfolio that offers very strong downside protection and captures much of the market's upside," she says. "If you can succeed at that goal, you can potentially produce healthy long-term returns and have a smoother ride along the way."

Fidelity customers can search for individual dividend-paying stocks using the Fidelity Stock ScreenerLog In Required. Or, to search for mutual funds or ETFs that focus on dividend-paying stocks, investors can use the Fidelity Mutual Fund Research tool or ETF ScreenerLog In Required.