These dividend-growing stocks could deliver higher returns, says Morgan Stanley

Morgan Stanley strategist Todd Castagno recommends dividend stocks for portfolio stability and income, particularly in the current market characterized by high valuations and potential interest rate cuts, noting that companies significantly increasing their dividends tend to outperform. He highlights firms like PG&E, Goldman Sachs, and Eli Lilly, all of which have recently boosted their payouts by over 15% quarter-over-quarter, with Eli Lilly also raising its full-year guidance on strong drug demand, underscoring the potential for both dividend growth and robust underlying business performance.

Analysis

Morgan Stanley strategist Todd Castagno recommends dividend stocks for portfolio stability and income, particularly given high market valuations and recent volatility. He highlights companies with market caps over $100 billion that have increased dividends by at least 15% quarter-over-quarter over the past 12 months, noting these firms historically outperform by an average of 3.1% six months post-increase. This strategy gains traction as the Federal Reserve's recent rate cut makes stable, higher-yielding dividends more appealing.

Goldman Sachs (GS) and Eli Lilly (LLY) demonstrate strong alignment with this strategy. Goldman Sachs reported robust Q3 results, exceeding expectations on both lines due to strong investment banking and fixed income trading, driving a 38% YTD stock rally and a 33.3% dividend increase. Eli Lilly also significantly surpassed Q3 estimates, raising its full-year outlook on strong demand for Zepbound and Mounjaro, while increasing its dividend by over 15% and gaining 10% YTD.

PG&E (PCG) offers a mixed profile; despite a substantial 150% dividend increase and an EPS beat in Q3, its revenue missed consensus, and the stock is down 22% YTD. However, analysts maintain a "Buy" rating with 35% upside potential. The varied performance among these dividend growers emphasizes the necessity of comprehensive fundamental analysis beyond just dividend policy.

Key Decisions for Investors

• Investors should consider dividend-growth stocks, particularly those with consistent, significant payout increases, as a defensive strategy for income and stability
• Evaluate companies like Goldman Sachs and Eli Lilly, which show strong fundamental performance, positive outlooks, and substantial dividend growth, for potential portfolio inclusion
• Exercise caution and conduct deeper due diligence on companies like PG&E, where strong dividend growth is present but accompanied by mixed financial results or significant YTD underperformance
• Monitor Federal Reserve monetary policy and interest rate movements, as these factors directly influence the relative attractiveness of dividend-yielding assets