Morgan Stanley says stock market may break down again so buy these top dividend payers
Markets could remain under pressure through the end of the year, and high dividend stocks are one option to help investors through the uncertainty, according to Morgan Stanley. Mike Wilson, the firm's chief investment officer and equity strategist, said the combination of higher rates and cyclical uncertainty could weigh on the stock market through the rest of the year despite the recent correction from what he deems a false breakout in the S & P 500 from May to July. Investors are also assessing pressures on the market driven by the surprise attack on Israel by Palestinian militant group Hamas over the weekend. "The counter argument is that the correction since July has now properly adjusted for the short term over-excitement around the numerous drivers of the rally in the S & P 500 this year," he said in a note Monday. "Our view is that those tactical support levels will eventually give way amid weak breadth, elevated rates and growth prone to disappointment, particularly in the absence of a near-term policy catalyst the market can look forward to." To play another potential breakdown in the market, Morgan Stanley highlighted several dividend stocks that combine yield (how much a company pays out in dividends each year), dividend growth (how much that dividend grows over a period of time) and stability, and that look attractive on a three- to five-year basis. Here are 10 of those names: Energy stocks are among the highest dividend yielders on the list due to conservative balance sheets and capital allocation strategies, according to Wilson. Morgan Stanley projects yields of 9.6% for Energy Transfer in 2024 and 9.9% for MPLX, a master limited partnership created out of Marathon Petroleum that operates crude oil and refined product pipelines. Dividends are secure in the tobacco sector, which is cash generative, has limited need for capital spending, relatively low leverage and prioritizes dividends as a use of capital, Wilson said. The bank's preference in tobacco is Philip Morris , whose 2024 dividend yield could be 5.5%, according to Morgan Stanley. Packaged food is also a good place to look for dividends, given the sector's steady demand, high margins, strong free cash flow and modest leverage, Wilson said. Oreo cookie and Ritz cracker maker Mondelez is the top dividend pick in that category. Given the "generally predictable demand for everyday use products and cash generative business models," household product stocks are another sector with "highly secure" dividends, though they're on the lower end of the list in terms of yields. Procter & Gamble and Colgate-Palmolive are among the top picks, with 2024 yields projected at about 2.5% and 2.7%, respectively. "We believe [they] offer attractive [high single digit] EPS growth and subsequently dividend growth, with sustained market share gains behind strong execution, and a [gross margin] recovery tailwind as pricing outweighs cost pressure near-term, allowing for greater reinvestment behind the business," Wilson said. "These companies understand the importance of a steady and rising dividend as part the total shareholder return to their investor base." Utility Exelon , Regions Financial , Verizon and Hess were among Morgan Stanley's other picks. — CNBC's Michael Bloom contributed reporting.