The Federal Reserve’s move to start cutting interest rates bodes well for dividend-paying stocks, and Morgan Stanley thinks several companies are poised to join their ranks. Central bank policymakers last week cut interest rates by a half point, lowering the benchmark federal funds rate to a range of 4.75% to 5.00%. The Fed’s shift in policy will result in lower yields for Treasurys and other bonds, which can make dividend-paying stocks even more attractive for income-seeking investors. Dividends can also help buffer investors’ portfolios during periods of market turmoil, which could be around the corner as election season heats up and interest rates begin to normalize. “Equity investors are seeking durable, higher yielding dividends as market volatility is expected to continue throughout the easing cycle,” wrote Morgan Stanley strategist Todd Castagno in a report last Friday. Companies that have the financial wherewithal to initiate and pay regular dividends also tend to beat the market in the months after they announce these payments, his team found. Names that started dividend payments in 2024 include Alphabet , Salesforce and Meta Platforms . Based on more than 300 dividend initiations dating back to 2000, excluding real estate companies, those that begin paying regular quarterly dividends beat the market by 6.5 percentage points in the six months following the announcement, Castagno found. Those stocks outperformed the market by 9.2 percentage points one year after announcing the start of dividend payments. Morgan Stanley drew up a list of companies that might have what it takes to start paying dividends, drawn from stocks that boast net cash and generate a free cash flow exceeding 3%. Cloud computing company Nutanix showed up on Morgan Stanley’s screen. The company has a current free cash flow yield of 4.1%, the investment bank found. Wall Street also recommends the stocks, with 82% of the analysts covering Nutanix rating it a buy or strong buy, according to LSEG. Consensus price targets suggest nearly 20% upside from current levels. Piper Sandler analyst James Fish rates Nutanix overweight. His price target of $77 implies nearly 27% upside from Tuesday’s close. Fish highlighted “strong renewal activity” benefiting the company, along with new business opportunities. The company also issued an outlook for 2025 that struck “a perfect balance,” including a hike to free cash flow guidance to a range of $540 million to $600 million, up from an earlier forecast with a high end of $550 million, the analyst said. Shares of Nutanix are up around 27% in 2024. Instacart was also seen as a potential dividend initiator by Morgan Stanley. The company has a current free cash flow yield of 6%, according to the bank. Wall Street is split on the company, with 15 of the 29 analysts covering Instacart rating it a buy or strong buy and the remainder a hold, according to LSEG. The average price target implies upside of about 10%. Raymond James recently initiated research coverage of Instacart with a “market perform” rating. “Our ‘Enterprise Cart Rolling’ thesis recognizes the impressive management execution in developing in-depth technology integrations across 1,500 banners that often feature legacy/customized point-of-sale systems with 1B+ lifetime orders and tenured shoppers that are often assisted with detailed maps that lead to higher order accuracy,” wrote Raymond James analyst Josh Beck in a report. Shares of Instacart are up 73% in 2024. Other companies that Morgan Stanley highlighted as potential dividend initiators include short-term vacation rental company Airbnb and biotech play United Therapeutics .
