The Fed's Rate Cuts Will Make Dividend Stocks More Appealing to Income Investors

With the Federal Reserve widely expected to restart its rate-cutting cycle this Wednesday, many investors may begin shifting their focus toward dividend-paying stocks as an alternative source of income.

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Markets are fully pricing in a rate reduction at the Fed’s upcoming meeting, with most anticipating a 25-basis-point (0.25%) cut, according to the CME FedWatch tool. That means yields from cash instruments such as money market funds and short-term bonds are likely to decline. Since bond yields move inversely to prices, the appeal of steady dividends tends to rise in this environment.

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Lower bond yields often make dividend payouts stand out as a more compelling option. Morgan Stanley notes that dividends can also help investors remain invested through periods of uncertainty.

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“In times of heightened risk and lofty valuations, dividends become a more meaningful contributor to overall returns,” strategist Todd Castagno explained in an August 14 note. “They help smooth volatility and support stock prices. When growth slows and interest rates fall, consistent, higher-yielding dividends look even more attractive compared to cash or fixed income.”

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However, chasing the highest yields can be risky. An unusually high dividend may signal financial stress within a company. That’s why many investors prioritize dividend growth instead. Morgan Stanley’s research shows that, on average, companies that announce dividend increases outperform the market by 3.1% in the six months following the announcement, Castagno said.

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One proven approach is investing in “dividend aristocrats” S&P 500 companies that have raised their payouts every year for at least 25 years. The ProShares S&P 500 Dividend Aristocrats ETF, which tracks this group, currently offers a 2.46% dividend yield with a 0.35% expense ratio. By comparison, the S&P 500 overall yields just 1.12%. The ETF’s largest positions include C.H. Robinson Worldwide, Lowe’s, and AbbVie.

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Not every worthwhile dividend stock qualifies for the aristocrats list. Several experts argue that companies with shorter but consistent records of growth can also be strong candidates.

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“The 25-year rule feels a little dated,” said Jack Ablin, chief investment strategist at Cresset. For example, Apple one of the most valuable companies in the world wouldn’t qualify since it reinstated its dividend only in 2012.

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Ablin looks for quality firms with a strong history of maintaining and growing dividends, even if their track record doesn’t stretch decades.

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“These companies often keep payout ratios steady, allowing earnings growth to outpace inflation,” he explained. Beyond dividend history, Ablin evaluates cash flow, leverage ratios, and overall business resilience.

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“We want businesses with sufficient liquidity, reasonable debt levels, and operations in less cyclical sectors,” he said. “That way, they can weather both downturns and expansions.”

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He cited Chubb and Cardinal Health as examples. Chubb offers a 1.41% dividend yield but has dipped 1.7% this year. Cardinal Health, on the other hand, yields 1.36% and has gained 26% year to date.

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Dividends are important, but investors shouldn’t overlook growth potential. Kevin Simpson, CEO of Capital Wealth Planning, builds portfolios around dividend growers, often with at least a five-year history of payout increases.

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“If earnings are driving dividend growth, you should also expect the share price to rise over time,” Simpson said.

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Matt Quinlan, portfolio manager at Franklin Templeton, agrees. He highlights that dividend growers are often sector leaders, disciplined in reinvesting earnings, and committed to rewarding shareholders. “Those qualities typically translate into capital appreciation and resilience in challenging markets,” he said. Quinlan co-manages the Franklin Rising Dividends Fund.

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Currently, he sees opportunities in financials. Banks tied to capital markets are benefiting from increased activity, and deregulation combined with lower rates could further boost the sector. Strong consumer spending adds another tailwind.

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“We’re seeing healthy dividend growth too,” Quinlan said, noting several banks boosted payouts this summer after passing Fed stress tests. The Franklin fund holds Morgan Stanley, yielding 2.55% with a 24% gain this year, and Charles Schwab, yielding 1.17% and up 23% year to date.

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Simpson is also bullish on major financial players like JPMorgan and Goldman Sachs. Both stocks have already posted strong gains this year but remain attractive due to robust profitability. JPMorgan yields 1.81% and is up 29% year to date, while Goldman Sachs yields 2.03% and has surged 37%.

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Outside of financials, Simpson highlights Home Depot as a compelling dividend play. The home improvement giant yields 2.18% and has risen over 8% in 2025.

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Not only does Home Depot boast solid dividend growth, but it also stands to benefit from lower rates. “Homeowners may use cheaper HELOCs to fund renovations they’ve put off since the pandemic,” Simpson said. In addition, the company’s strong commercial business positions it well for demand from real estate investors upgrading properties.

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