Bank of America says these dividend stocks have a history of outperformance in this environment

Bank of America's U.S. Regime Indicator confirmed a recovery phase in August, strengthening for the second consecutive month, signaling a favorable environment for high-dividend yield strategies. Historically, such strategies outperformed the equal-weighted S&P 500 by 4.5%-5.6% during recovery periods, and dividends are now expected to contribute more to total returns. BofA strategist Savita Subramanian recommends investors seek "above-market but not stretched" dividend yields, specifically within the second quintile of the Russell 1000, to avoid distressed companies, citing examples like Regions Financial and Exelon.

Analysis

Bank of America's U.S. Regime Indicator has confirmed a 'recovery phase' for the second consecutive month as of August, a signal that has historically favored high-dividend yield strategies. According to BofA's equity strategist Savita Subramanian, this factor strategy has outperformed the equal-weighted S&P 500 by an average of 4.5% to 5.6% during past recovery periods. The analysis suggests that dividends may play a more significant role in total returns going forward than they did in the zero-interest-rate era. However, a key refinement is advised: investors should target the second quintile of dividend yielders in the Russell 1000. This approach is designed to capture above-market yields while avoiding the highest-yielding, potentially distressed companies that risk dividend cuts. Illustrative examples fitting this screen include Regions Financial (RF), with a 3.92% yield and a 16% year-to-date gain, supported by strong profitability metrics. Exelon (EXC) offers a 3.68% yield and is benefiting from a data-center boom driving electricity demand, with 17 gigawatts of new customers in its pipeline. Amgen (AMGN) has a 3.43% yield and is making significant capital investments in U.S. R&D. In contrast, AvalonBay Communities (AVB) also fits the screen with a 3.57% yield and an overweight analyst rating, but its stock has declined nearly 11% year-to-date, highlighting that individual stock performance can diverge from the factor trend.

Key Decisions for Investors

• Consider tilting portfolios towards high-quality, high-dividend stocks, focusing specifically on the second quintile of yielders to mitigate the risk of value traps often found in the highest-yielding cohort.
• Evaluate individual company fundamentals within the dividend screen, such as Exelon's exposure to the data-center boom or Regions Financial's strong market positioning, as these are key drivers of performance beyond the dividend factor itself.
• Monitor the BofA U.S. Regime Indicator, as a shift away from the 'recovery' phase could weaken the thesis for dividend-yield outperformance, and be mindful of stock-specific risks, as evidenced by AvalonBay's negative year-to-date performance despite its favorable dividend profile.