Now could be a good time to start buying stocks with high dividend yields, according to BMO Capital Markets. The S&P 500’s highest-paid stocks have significantly underperformed the index over the past year and a half, even with the rebound they’ve had in recent months, said chief investment strategist Brian Belski. Higher interest rates have weighed on the group after investors found attractive yields in the bond market. Those yields are expected to begin falling as the Federal Reserve begins to cut interest rates. The market is pricing in a 100% chance of a cut at the central bank’s September meeting, according to the CME FedWatch Tool based on traders’ bets. “The relationship between these stocks and interest rates has been misunderstood in recent years, and their significant underperformance was likely an overreaction by investors,” Belski wrote in a July 30 note. However, the likely fall in long-term yields in response should provide impetus.” BMO’s analysis of historical trends also shows that this kind of underperformance is usually followed by an “impressive recovery,” he added. In addition, the severity of the underperformance appears to be out of step with the group’s fundamentals, Belski noted. Here are some of the high-paying names on BMO’s buy list. The company is rated an outperform by analysts and is in the top 25% of S&P 500 stocks based on dividend yield. Two drugmakers were among those BMO believes will outperform. Pfizer is up 5.73%, up about 2% year-to-date, as of Tuesday’s close. The pharmaceutical giant’s second-quarter revenue and adjusted earnings beat expectations last week. The company, which benefited from its cost-cutting program and stronger-than-expected sales of its Covid antiviral pill, also raised its full-year outlook. Pfizer is also developing a daily version of its weight loss pill. In July, the company said it saw “encouraging” data in an early-stage study and plans to conduct more early-stage trials in the second half of the year. Meanwhile, AbbVie shares have a dividend yield of 3.34% and are up nearly 20% year-to-date. With the drug Humira fighting generic competition, AbbVie is looking to expand its product line. Last week, it closed its $8.7 billion acquisition of Cerevel Therapeutics, which is developing a range of drugs to treat neurological and psychiatric conditions. In February, AbbVie completed its $10 billion acquisition of ImmunoGen, which develops cancer drugs. Among the utility company names listed are American Electric Power and Southern Company. The first one has a dividend yield of 3.58%, while the second one has a dividend yield of 3.33%. Utilities have been one of the S&P 500’s best-performing sectors this year, thanks to expected demand for electricity to power AI data centers. The industry is up about 16% year-to-date. Meanwhile, shares of American Electric Power have gained 21% so far this year, while Southern has rallied more than 23%. Real estate, on the other hand, is one of the worst-performing S&P sectors so far, up 4% compared with the S&P’s roughly 16% gain. BMO was bullish on investment trusts in real estate and believes the industry is poised for recovery. Two names on his list are Digital Realty Trust and Host Hotels & Resorts. Digital Realty Trust, which pays a dividend yield of 3.28%, owns, develops and operates data centers — which are expected to see increasing demand thanks to artificial intelligence. Last week, the company reported core funds from operations for the second quarter that beat estimates, while its revenue beat expectations. Shares have gained about 10% year to date. Host Hotel & Resorts, which owns luxury and upscale hotels, has a dividend yield of 4.92% and is down 16% so far this year. The company’s second-quarter funds from operations were slightly higher than estimates last week and its revenue was in line with expectations. However, the company lowered its full-year guidance for funds from operations and adjusted earnings before interest, taxes, depreciation and amortization.
