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In fact, the banking giant’s valuation model is forecasting a flat return for the stock market over the next decade.
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Depressing, right? But here’s the good news.
Bank of America U.S. equity and quant strategist Savita Subramanian highlighted one specific approach that could be critical to investors over the next 10 years: reinvesting dividends.
In a recent note to investors, she said that the simple act of reinvesting dividends could yield a total return “equivalent to the S&P 500 at 6,000,” assuming payout growth stays near its long-term average.
Not all dividends are created equal, though
Subramanian suggested looking at dividend growth stocks from the following three sectors — they might be worth sprinkling some of your spare change on.
Energy
Dividends from the energy sector aren’t exactly carved in stone. But with inflation picking up and oil prices on the rise, energy stocks are making a comeback.
Year to date, Chevron shares are up about 30%, Exxon Mobil has returned just over 50%, while ConocoPhillips is up a whopping 88%.
To put that in perspective, the S&P 500 returned around 20% during the same period.
In Q2, oil and gas giants delivered substantial year-over-year growth in both revenue and earnings.
Even with rebounding share prices, the supermajors still provide outsized dividend yields when compared to the rest of the market:
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ConocoPhillips pays 2.5%, Chevron offers 4.9%, while Exxon Mobil is yielding a juicy 5.6%.
Of course, energy is a volatile sector. And the long-term sustainability of fossil fuels is always a question.
The good news? If you’re on the fence about jumping into the space, some investing apps will give you a free share of Chevron or Exxon Mobil just for signing up.
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Financials
While market participants fear rising interest rates, financial companies — especially banks — look forward to them.
Banks lend money out at higher rates than they borrow at, pocketing the difference. And as interest rates increase, the spread earned by banks widens.
The sector is enjoying strong earnings growth this year. Several large banks also raised their dividends, which is particularly great for investors who want to reinvest them.
Goldman Sachs recently boosted its quarterly payout by 60% to $2 per share.
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Morgan Stanley doubled its quarterly dividend to $0.70 per share.
And JPMorgan Chase increased its quarterly rate by 11% to $1 per share.
All three banks are up at least 30% year to date And that means they’re not exactly cheap.
For instance, Goldman Sachs currently trades at over $400 per share. But you can get a piece of the bank using a popular stock trading app that allows you to buy fractions of shares with as much money as you are willing to spend.
Materials
The third sector suggested by Subramanian is materials, which include companies that engage in the discovery, development, and processing of raw materials.
It’s not an exciting sector by any means, but over the years, materials have demonstrated resilience in times of high inflation. And inflation is picking up, whether the Fed believes it’s transitory or not.
The S&P 500 Materials index is up about 16% year to date, less than the broader market.
But if consumer prices continue to rise over the next decade, materials stocks are perfectly positioned to outperform.
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Investors can gain exposure to materials through ETFs like the Materials Select Sector SPDR Fund, which currently offers a dividend yield of 1.6%
Or, you can go with individual dividend-paying stocks in the sector, such as copper miner Freeport-McMoRan, industrial gas producer Linde, and special chemicals giant DuPont.
Ultimate asset in a ‘lost decade’
If Bank of America’s prediction is accurate, it’ll be a very challenging decade for stock market investors.
With valuations already extended, much of the country’s corporate growth prospects may be already priced in.
But there’s an asset that’s intrinsically valuable — U.S. farmland.
Whether we face a boom or bust, people will still need to eat.
New platforms allow you to invest in farmland by taking a stake in a farm of your choice.
Even if the stock market stays flat over the next 10 years, you’ll earn cash income from the leasing fees and crop sales. And of course, you’ll benefit from any long-term appreciation on top of that.
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Jing is an investment reporter for Moneywise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
