These stocks have high dividend growth and the cash to keep hiking payouts, says Wolfe Research

Wolfe Research is urging income-seeking investors to prioritize stocks with strong dividend growth backed by high free cash flow-to-firm yields—a strategy it says is increasingly attractive as bond yields fall after two Fed cuts and amid recent market weakness tied to frothy AI valuations. The firm highlighted Nexstar (≈4% yield, 17% LTM dividend growth, ~12% estimated FCF-to-firm yield for 2026, $3.5bn Tenga acquisition and ~29% analyst upside), Merck (3.49% yield, 5% LTM dividend growth, ~9% estimated FCF-to-firm yield for 2026, $9.2bn Cidara deal, Keytruda sales >$8bn and $3bn cost-cut program), and Qualcomm (≈2.13% yield, 5% LTM dividend growth, ~6.7% estimated FCF-to-firm yield, recent beat and new AI accelerator chips, ~18% analyst upside) as examples that combine dividend-growth signaling with cash-flow capacity to sustain payouts and offer potential total-return upside.

Analysis

Wolfe Research recommends income-focused investors prioritize companies that combine high dividend growth with strong free cash flow to the firm, arguing this pairing signals management confidence and funds sustainable payout increases; the call comes as the S&P 500 is on pace for a fourth straight decline amid frothy AI valuations and after two Fed rate cuts this year (most recently in October), which has pushed bond yields lower and made dividends relatively more attractive. Free cash flow to the firm is defined here as unlevered cash available to equity and debt holders after operating expenses and capex, and Wolfe screened names with above-average estimated FCF-to-firm yields for 2026. Wolfe highlighted Nexstar (yield ~4%, LTM dividend growth 17%, ~12% estimated FCF-to-firm yield for 2026, $3.5bn Tenga acquisition expected to close H2 next year, ~29% analyst upside, +19% YTD), Merck (3.49% yield, 5% LTM dividend growth, ~9% estimated FCF-to-firm yield for 2026, nearly $9.2bn acquisition of Cidara, Keytruda sales >$8bn quarterly, $3bn cost-cut plan, -3% YTD) and Qualcomm (2.13% yield, 5% LTM dividend growth, ~6.7% estimated FCF-to-firm yield, fiscal Q4 beats, new AI accelerator chips, ~18% analyst upside, +~6% YTD). Key risks include execution on announced M&A and cost-reduction programs, potential pressure on payouts if FCF underperforms estimates, and continued market volatility driven by AI valuation repricing; sentiment signals in the report are mildly positive overall with stronger positive per-ticker sentiment for NXST, MRK and QCOM, suggesting analyst support but not a broad market catalyst given a low market impact score.

Key Decisions for Investors

• Consider overweighting select dividend-growth names with high estimated FCF-to-firm yields (e.g., Nexstar, Merck, Qualcomm) to capture yield plus potential capital upside, size positions modestly given idiosyncratic M&A and execution risks
• Monitor catalyst-specific milestones: Nexstar/Tegna closing timeline, Merck’s integration of Cidara and realization of $3bn cost savings, and Qualcomm’s AI chip rollout and quarterly FCF performance, and trim or hedge if any of these miss expectations
• Maintain defensive posture versus pure AI growth exposures as S&P weakness and lower bond yields favor income strategies, and use stop-losses or options to limit downside during continued valuation-driven volatility