The S&P 500, which was flying high during the first three months of 2024, lost some of its gains in April but is still up 8.6% so far for the year. Investors tempered their enthusiasm in recent weeks based on the latest data about inflation, which isn't going down without a fight. The Federal Reserve said it wouldn't raise interest rates right now, but it's also not going to cut them.
When there's economic flux, dividend stocks start to gain in popularity because investors know they can count on passive income regardless of the stock's performance. Dividend stocks also tend to present buying opportunities during these times because stock price drops tend to push up dividend yields.
Bank of America (BAC 0.18%) and American Express (AXP 0.62%) are two top dividend stock choices to consider right now. Both of their stocks are already rising this year as investors become more confident about the economy, and they could soar if or when the Federal Reserve does start to cut rates. Plus, they both trade at reasonable valuations despite their stock climbs.
1. Bank of America: Buffett's favorite bank
Bank of America is seemingly Warren Buffett's favorite bank stock, given that it accounts for 10.6% of the Berkshire Hathaway portfolio and is the second-largest holding (behind Apple). It's the second-largest U.S. bank by assets but it also has a consumer banking focus. Buffett likely appreciates this consumer focus. The consumer banking business was strong in the 2024 first quarter, and BofA added 245,000 new checking accounts in the quarter for the 21st consecutive quarter of increased accounts. It also added 1 million credit cards and a record 3.9 million investing accounts.
Its other segments are growing as well. It added 7,300 relationships in Global Wealth and Investment Management and 29,000 new bank accounts, and it ended the quarter with assets under management of close to $4 trillion, a 13% year-over-year increase.
At the moment, Bank of America is feeling some economic pressure associated with inflation and elevated interest rates. That combination results in slower general economic activity and higher default rates in loans and other credit products. Revenue decreased 2% year over year in the quarter, and earnings per share (EPS) excluding a one-time assessment expense declined from $0.94 last year to $0.83 this year. However, it maintained strong profitability, with adjusted net income of $7.2 billion and a strong capital position with common equity tier 1 capital of $197 billion. BofA cut about 4,700 jobs over the past year to reduce costs, and it's benefiting from investments in automation and its digital platform that are driving cost optimization.
BofA spent $4.4 billion on share repurchases and dividends in the first quarter, and the dividend yields 2.6% at the current price. Bank of America stock is up 10% this year, beating the market, but it's trading at a price to tangible book value of 1.5, or lower than its 5-year average and lower than most of its peers. It's a strong anchor stock with a reliable and growing dividend.
3. American Express: Buffett's favorite payments network
In public settings, Buffett often talks about Coca-Cola and American Express, his two longest-held stocks. At this year's annual meeting, he asserted that there is a consensus in the world that there may not be any other companies that can compete with American Express and Coca-Cola. Part of the reason these companies have an advantage is their dividends, which Buffett has an affinity for. It's likely a significant reason why American Express makes up 9.7% of the Berkshire Hathaway portfolio.
Berkshire also owns competing credit card networks Visa and Mastercard, but they account for just 0.6% and 0.5% of the overall portfolio, respectively.
Most consumers think of American Express as a credit card network, but its business model is different from Visa and Mastercard's. American Express operates a bank, unlike the others, which serves as the lending partner for the credit cards as well as offering various fintech services. There are advantages and disadvantages to this model. One of the disadvantages is that it's subject to interest rate fluctuations more acutely, it is directly affected by defaults, and it has to make provisions for losses that can impact its bottom line. On the other hand, as a bank, it has deposits, which it can invest and use to generate net interest income, which helps the bottom line. It also has lots of cash -- something Buffett loves.
American Express' dividend yield is also consistently higher than both Visa and Mastercard's.
V Dividend Yield data by YCharts
It has been reporting strong performance despite elevated inflation. Revenue increased 11% year over year in the 2024 first quarter to $15.8 billion, and EPS rose 39% to $3.33. It targets a more affluent demographic than the typical credit card user whose spending tends to be more resilient during tough times. Several years ago it adjusted its marketing efforts to try and lure a young generation of upscale shoppers to use its cards.
American Express stock has tripled the market's year-to-date gain at 23%, but it still trades at the reasonable price-to-earnings ratio of 19, which is much lower than Visa and Mastercard. It's reliable for gains and passive income, and its recent pivot to targeting a younger audience should help drive growth for many years to come.
