Bank of America says these companies have dividends that beat the market — but aren't stretching to pay

Bank of America Securities recommends investors focus on dividend stocks with 'above-market but not stretched' yields, specifically those in the second quintile of Russell 1000 dividend yielders, as a strategy for income in a volatile market with potential Fed rate cuts. This approach aims to identify sustainable payouts while avoiding distressed companies. Examples fitting this profile include Skyworks Solutions (3.65% yield, recent acquisition and preliminary earnings beat), CVS Health (3.4% yield, strong Q3 results and raised guidance), Phillips 66 (3.53% yield, Q3 beat), and Starbucks (3.07% yield, mixed Q3 results but returning same-store sales growth).

Analysis

Bank of America Securities advises investors to consider dividend stocks with "above-market but not stretched" yields, specifically those in the second quintile of Russell 1000 yielders, to navigate market volatility and potential Federal Reserve rate cuts. This strategy aims to identify sustainable payouts while avoiding distressed companies, especially as the Fed recently lowered the federal funds rate by a quarter percentage point with 65% odds of another cut by December.

Among the stocks highlighted by BofA, Skyworks Solutions (SWKS) offers a 3.65% yield and recently announced an acquisition of Qorvo, forming a $22 billion entity. SWKS also reported preliminary Q4 adjusted EPS of $1.76 and revenue of $1.10 billion, both exceeding FactSet consensus estimates of $1.40 and $1.01 billion, respectively. CVS Health (CVS), yielding 3.4%, demonstrated strong Q3 performance, beating estimates for both adjusted earnings and revenue, and subsequently raised its 2025 adjusted EPS guidance to $6.55-$6.65 from $6.30-$6.40.

Phillips 66 (PSX), with a 3.53% yield, also posted an earnings beat for its third quarter, contributing to its nearly 20% year-to-date gain. Starbucks (SBUX), yielding 3.07%, presented mixed Q3 results with disappointing adjusted earnings but beat revenue estimates and saw its same-store sales return to growth after approximately two years, indicating a potential operational turnaround despite a nearly 11% year-to-date decline.

Key Decisions for Investors

• Evaluate dividend stocks based on yield sustainability rather than solely high yield, prioritizing companies with "above-market but not stretched" payouts as recommended by Bank of America Securities.
• Monitor Skyworks Solutions for successful integration of Qorvo and sustained earnings performance following its preliminary Q4 beat and strategic acquisition.
• Consider CVS Health for its robust financial performance, including strong Q3 results and an upward revision of future guidance, indicating positive operational momentum.
• Assess Starbucks' ability to sustain its return to same-store sales growth and improve adjusted earnings, as this could signal a turnaround despite recent stock underperformance.