Markets are betting this week that the US Federal Reserve will cut interest rates for the third time in 2025. This could be good news for high-dividend stocks, and our portfolio includes many high-dividend stocks. What is the reason for that dynamic? A Fed rate cut could make assets that compete with dividend stocks for investment capital, such as bank CDs, money market funds and U.S. Treasuries, less attractive. The interest rates offered by these assets typically follow lower policy rates. If these assets start to become less attractive than before, income-seeking investors may look to move their money into high-dividend stocks. Historically, CDs, money market funds, and Treasury bills have all been considered safe places to store cash while earning interest, but they haven’t offered returns high enough to pull money away from stocks. That has changed in recent years, and the data shows it. As of Dec. 3, there was about $7.65 trillion in money market funds, according to the Investment Company Institute, a trade group. That’s up from about $4.8 trillion at the end of 2020, when the Fed interest rate was hovering near zero percent. To rein in inflation, which is at a 40-year high, the Fed began raising interest rates from essentially zero in early 2022 to the peak of its target range of 5.25% to 5.5% in July 2023, where it remained for more than a year as inflation slowed. The Fed began cutting rates in September 2024 and cut rates two more times by the end of last year. Central bankers are poised to cut interest rates again at each of their final three meetings this year. The market expects the Fed to cut interest rates by 0.5 percentage points to a range of 3.5% to 3.75% at the end of its December meeting on Wednesday afternoon. Beyond that, the Fed’s next move is a bit unclear. But one thing is certain: President Donald Trump will soon nominate a new Federal Reserve chairman to replace Jerome Powell, and he’s not shying away from his desire to lower interest rates. If the Fed cuts rates further, will what is perceived as a safe haven become less attractive? Early data points to that point. The index, which tracks the seven-day yield of the 100 largest money market funds, stood at 3.79% as of Sunday, nearly a percentage point lower than it was in late September 2024, just after the Fed began its rate-cutting cycle. Similarly, the average interest rate on three-year CDs was 3.6% in November, down from 4.3% in January, according to Federal Reserve data. To be sure, stocks carry more risk than CDs, money market funds, and U.S. Treasuries. This is because stocks can fall in price, putting your initial investment at risk in a way that typically does not occur with these alternatives. Just like with bonds, as stock prices rise, dividend yields fall. In the context of income investing, dividend stocks offer the potential for appreciation in value, while also issuing regular dividends that enhance their return profile. This also applies to stocks with what are considered modest dividend yields, which the club primarily has in its portfolio. Although we value dividends and the role they can play in a balanced portfolio, we do not pursue an investment strategy that focuses on income. Our goal is to invest in high quality companies that we believe will increase in stock value over time. In some cases, their dividends can lead to more investment deals because we get paid to wait for our papers to be published. But one of the great things about the stock market is that each investor has their own goals and priorities. This means that some club members may place more emphasis on collecting dividends. It’s hard to blame people for seeking dividend protection. Also, remember that Jim Cramer’s Charitable Trust (the portfolio we use for our club) does not reinvest dividends, but instead donates all dividend income and capital gains to charity each year. In this way, we lose the power of compound interest, but members should definitely take advantage of it and increase their profits significantly. We have previously discussed the importance of doing so. We also detailed how to determine whether a company can afford to continue paying its dividend. With that in mind, here’s a look at the 10 club stocks with the highest dividend yields as of Friday’s close, along with their ratings and how much each company paid in dividends over the past two fiscal years. All 10 companies have increased their dividends, which is a good sign. The longer a company has a history of increasing dividends, the better. As Jim writes in his new book, “How to Make Money in Any Market,” high dividends that increase year after year “should not be taken for granted.” (For reference, the S&P 500 as a whole has a yield of about 1.1%, according to FactSet.) The list above is split 50-50 between club stocks with a rating of 1, which equates to buy, and club stocks with a rating of 2, which equates to hold. Among 1-rated stocks, Director of Portfolio Analysis Jeff Marks recently highlighted Nike and Starbucks as two stocks poised for a recovery year in 2026. Additionally, Home Depot could benefit from rate cuts in a much more important way than making its dividend yield look more attractive. If mortgage rates drop significantly and housing activity picks up, the company’s results could grow rapidly. Procter & Gamble is our newest name, added to our portfolio last month as a way to add exposure to economically resilient companies that could benefit from rotation away from speculative bets. P&G is also considered a Dividend Aristocrat and has raised its dividend every year for the past 25 years. In P&G’s case, they’ve been doing so for 69 consecutive years. (Club names Linde and Dover are also Dividend Aristocrats, but they fell outside the top 10 when measured by dividend yield at 1.5% and 1.09% respectively). Finally, next year, Honeywell plans to spin off its crown jewel aerospace division into a standalone company while retaining its recovery industry automation business, a long-awaited deal that should reward investors who stick with it. As a result, Honeywell’s dividend payments could look a little different this time next year. Honeywell took the first step in its journey by separating Solstice Advanced Materials on October 30th. (See here for a complete list of Jim Cramer’s Charitable Trust stocks.) As a subscriber to Jim Cramer’s CNBC Investing Club, you’ll receive trade alerts from Jim Cramer before he makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
