Morgan Stanley Highlights Stocks Likely to Boost Returns With Potential New Dividends for Investors

Think of dividends like getting a small bonus every few months just for owning a company’s stock—kind of like getting a free cookie every time you visit your favorite bakery. For investors, these little bonuses can really add up over time, making some companies extra sweet to own.

Why Dividend News Matters for Investors

When companies start paying dividends, it can be a big deal for investors. Not only do you get regular payouts, but stocks that begin giving dividends often do better than the rest of the market. In fact, Morgan Stanley says that companies starting a new dividend beat the market by about 6.5% in the first six months, and by 10% in the first year after the announcement. [Source]

This is important because steady payouts and strong stock performance can make your investment portfolio healthier in the long run.

Bulls: The Upside of Dividend Starters

• Extra Returns: Stocks that start paying dividends often see a nice boost, giving investors more than just the regular market growth.
• Compounding Power: If you reinvest those dividends to buy more shares, your money can grow even faster over time. According to a study by Hartford Funds, reinvested dividends made up about 69% of the total return of the S&P 500 from 1960 to 2023. [See the study]
• Sector Strength: New dividend payers often come from sectors like Consumer Staples, Utilities, and Energy, which tend to be more stable during tough times.

Bears: The Risks and Downsides

• Cash Flow Pressure: Paying dividends means the company has to set aside cash, which could limit how much they can invest in growth or new ideas.
• Not All Dividends Are Equal: Some companies might start with a very low yield, especially in sectors like Tech or Consumer Discretionary, which might not excite income-focused investors.
• Performance Isn’t Guaranteed: While many dividend starters do well, there’s no promise every company will outperform after starting a payout.

Spotlight on Potential Dividend Starters

Morgan Stanley looked for “dividend hopefuls”—companies that don’t pay a regular dividend yet, have lots of extra cash, and strong free cash flow (over 5%). Here are a few standouts:

• Centene: Health insurer with a whopping 18% free cash flow yield. The stock is up 44% this year, and investors like David Einhorn see big potential, especially as the company uses AI to get more efficient.
• BioMarin Pharmaceutical: This drugmaker just bought Amicus Therapeutics for $4.8 billion, expanding into rare disease treatments. Even though the stock is down 6% this year, its strong cash flow and new products could make it a future dividend payer.
• Duolingo: The language app’s stock has dropped 36% this year, but revenue and profits are up. They’re focused on growing users, aiming for 100 million daily users by 2028. If growth continues, dividends could be next.
• Deckers Outdoor: Known for Hoka and Ugg, Deckers has a 6.7% free cash flow yield and has gained 10% this year. Analysts say its strong brands and profits make it a solid candidate for starting dividends.

Investor Takeaway

• Watch for Announcements: Companies starting dividends can give your portfolio a boost—keep an eye on news from strong cash generators.
• Diversify by Sector: Consider owning dividend starters from different industries for a smoother ride.
• Reinvest Dividends: If possible, reinvest payouts to maximize growth through compounding.
• Check the Fundamentals: Make sure companies have healthy cash flow and aren’t stretching to pay dividends.
• Balance Growth and Income: Blend dividend stocks with growth names to keep your investment plan strong in all kinds of markets.

For the full original report, see CNBC