Fed rate cuts can boost dividend stocks. Here are our top-yielding names
The market expects the Federal Reserve this week to cut interest rates for the third time in 2025. That could be good news for dividend-paying stocks — and we have a lot of them in the portfolio. The reason for that dynamic? Fed rate cuts can weaken the appeal of assets that compete with dividend stocks for investment dollars, such as bank CDs, money market funds, and U.S. Treasurys. The interest rate offered by those assets typically follows policy rates lower. If those assets start to look less attractive than before, investors who are looking for income may look to move their money into dividend-paying stocks. Historically, CDs, money market funds, and shorter-term Treasurys — all considered safe places to park cash while earning some interest — have not offered returns high enough to pull money away from stocks. In recent years, that has shifted, and the data shows it. There was about $7.65 trillion in money market funds as of Dec. 3, according to the Investment Company Institute trade group. That’s up from about $4.8 trillion at the end of 2020 , when the Fed rates hovered near zero percent. To tame inflation running at four-decade highs, the Fed began to hike interest rates in early 2022 from basically zero to a target range peak of 5.25% to 5.5% in July 2023 and stayed at that level for more than a year as inflation moderated. In September 2024, the Fed started to cut rates and did so two more times before the end of last year. Central bankers are once again poised to lower rates at each of this year’s final three meetings. The market expects a quarter-point rate cut to a range of 3.5% to 3.75% at the end of the Fed’s December meeting on Wednesday afternoon. Beyond that, the Fed’s next move is a bit murkier. But one thing that is certain: President Donald Trump will soon nominate a new chair of the Federal Reserve to replace Jerome Powell, and Trump has not been shy about his desire to see lower rates. Will further Fed rate cuts reduce the appeal of those perceived safe havens? Early data points that way. An index tracking the seven-day yield on the 100 largest money market funds stood at 3.79%, as of Sunday — roughly a full percentage point lower than in late September in 2024 , shortly after the Fed commenced its rate-cutting cycle. Similarly, the average interest rate on a three-year CD was at 3.6% as of November, according to Federal Reserve data , down from 4.3% in January. To be sure, stocks carry more risk than CDs, money market funds, and Treasurys because they can go down in price, jeopardizing your initial investment in a way that those alternatives generally will not. Much like bonds, when a stock price goes up, its dividend yield goes down. In the context of income investing, dividend stocks offer the potential to go up in value, while also issuing a regular payout that sweetens the return profile. That holds true for stocks with a dividend yield that is considered modest, which is primarily what the Club has in its portfolio. While we value dividends and the role they can play in a well-balanced portfolio, we don’t run an income-oriented investment strategy. Our goal is to invest in high-quality companies whose stocks, we believe, will increase over time. In some cases, their dividend adds to the investment case because it enables us to get paid to wait for our thesis to play out. One great thing about the stock market, though, is that each investor has their own goals and priorities – and that means some Club members may place greater emphasis on collecting dividend payments. It’s hard to fault anyone for wanting dividend protection. Also, remember that Jim Cramer’s Charitable Trust — the portfolio we use for the Club — does not reinvest the dividends and instead donates to charity each year all our dividend income and capital gains. In that way, we lose out on the power of compounding, but members should definitely take advantage to super-charge their returns. We’ve discussed the importance of doing so in the past . We have also detailed how to figure out whether a company can afford to keep paying its dividend . With that in mind, here’s a look at the 10 Club stocks with the largest dividend yields as of Friday’s close, along with our ratings on each of these names and the amount of money each company paid out in dividends during its past two fiscal years. All 10 companies grew their dividend payouts, which is a good sign. The longer a company’s history of increasing its payout, the better. As Jim wrote in his new book — “How to Make Money in Any Market” — good dividends that go up every year “are not to be taken for granted.” (For reference, the S & P 500 as a whole has a yield of about 1.1%, according to FactSet.) This list above is split 50-50 between Club stocks with our buy-equivalent 1 rating and those with our hold-like 2 rating. Among those with a 1 rating, Director of Portfolio Analysis Jeff Marks recently highlighted Nike and Starbucks as two stocks that are set up for a bounce-back year in 2026 . Additionally, Home Depot could also benefit from rate cuts in ways far more important than its dividend yield looking more attractive: If mortgage rates see a material decline that unlocks housing activity, its business could roar. Procter & Gamble is our newest name, added to the portfolio last month as a way to add exposure to an economically resilient company that could benefit from a rotation away from speculative bets. P & G is also considered a dividend aristocrat, meaning it has raised its dividend for each of the past 25 years. In P & G’s case, it has done so for 69 consecutive years . (Club names Linde and Dover are also dividend aristocrats, but they fell outside our top 10 as measured by dividend yield, at 1.5% and 1.09%, respectively). Lastly, Honeywell is on its way to separating its crown jewel aerospace division into a standalone company next year while retaining its recovery industrial automation business, in a long-awaited transaction that should reward investors who stick with it. For that reason, Honeywell’s dividend payment could look somewhat different at this time next year. Honeywell took the first step on its journey on Oct. 30, when it spun off Solstice Advanced Materials . (See here for a full list of the stocks in Jim Cramer’s Charitable Trust .) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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