Investors might not be seeing as many rate cuts in 2025 as they had initially hoped, yet there are still promising prospects for dividend-paying stocks. Last week, the Federal Reserve rolled out its updated forecasts, indicating two interest rate cuts in the upcoming year, instead of the four suggested by policymakers back in September. Generally, when interest rates decline, dividend stocks find themselves in a favorable position compared to the risk-free yields of Treasurys.
Charles Gaffney, managing director at Morgan Stanley Investment Management and portfolio manager of the Eaton Vance Dividend Builder Fund (EIUTX), noted, “as the Fed lowers rates, you see money market rates starting to come down as well.” For example, the Crane 100 Money Fund Index, now features an annualized seven-day yield of 4.27%, a drop from 5.13% at the end of July. Total money market fund assets hit $6.81 trillion as of the six-day period ending December 24, according to the Investment Company Institute.
But lower interest rates aren’t the only boost for dividend payers in 2025. President-elect Donald Trump has advocated reducing the corporate tax rate to 15% from the current 21%. Such a reduction could enhance company cash flows, leading to potential increases in dividends, buybacks, and mergers and acquisitions, explained Gaffney.
Dividend-paying stocks often belong to companies that have already experienced significant growth, tending to be stable. However, 2024 shook up this notion as major tech firms initiated dividend payments for the first time. Giants like Meta Platforms, Salesforce, and Alphabet began distributing dividends this year. Though these dividends are initially small—Meta offers 50 cents per share with a 0.3% yield—they still promise shareholders a mix of price appreciation and potential for dividend increases. These dividends also benefit investors who prefer reinvesting them, leading to compounded growth. “That’s a big shift in the market,” said Cheryl Frank, a portfolio manager with Capital Group’s Conservative Equity ETF (CGCV). “You’re seeing these tech leaders beginning their journey as dividend payers.”
Meanwhile, the utilities sector also enjoyed a noteworthy year, even as its growth trailed the S&P 500—up about 21% compared to the index’s 26% rise. Companies in this sector captivated investors with their role in powering AI data centers. Constellation Energy’s shares nearly doubled after announcing plans to restart the Three Mile Island nuclear plant, slated to power Microsoft in 2028. Similarly, Vistra’s shares have skyrocketed by over 270% in 2024, driven by its anticipated contribution to the AI sector with nuclear power. Both boast dividend yields of 0.6%. “We had 20 years of stagnating electricity demand due to offshoring and efficiency improvements,” Frank observed. “But now, with electrifying vehicles and the AI boom demanding more energy, there’s renewed growth.” Frank also pointed out that sectors like utilities, consumer staples, and healthcare are ripe for finding companies that are “reasonably valued on a relative basis.”
Looking ahead to 2025, Gaffney from Morgan Stanley mentioned chip maker Broadcom as a standout, with its shares more than doubling in 2024 and climbing over 50% in December alone. The stock carries a dividend yield of 1%, and it holds a significant place in EIUTX’s portfolio. Broadcom’s CEO, Hock Tan, projected the total market for the company’s AI chips and networking components could hit between $60 billion and $90 billion by 2027. Gaffney remarked on the solid fundamentals, stating, “That makes a compelling case for the business to continue thriving,” referring to Tan’s optimistic guidance about the abundant growth opportunities.
Gaffney also expressed favor for EOG Resources, another holding in EIUTX. Although its stock hasn’t moved much this year, it does offer a dividend yield of 3.2%. “It’s a bit of a contrarian play in the energy sector,” Gaffney noted, highlighting EOG’s strong management despite the sector’s muted participation in the year’s rally. “They manage their operations with a 3% dividend yield that has been growing at a high single-digit pace,” he said. Furthermore, EOG regularly generates enough capital to issue special dividends, beyond their regular payout cycle. “All told, EOG offers a 3% yield and, as it continues its growth trajectory, could very well approach a 4% dividend income yield with these additional dividends,” Gaffney concluded.
