The Fed is Likely to Cut Interest Rates in 2025. Here’s What It Means for Dividend Payers

In 2025, dividend-paying stocks are expected to benefit from several favorable trends, even as the Federal Reserve signals fewer interest rate cuts than some investors had anticipated. The central bank recently projected two rate reductions for the upcoming year, falling short of the four cuts forecasted earlier in September. However, lower interest rates typically enhance the appeal of dividend stocks by making them more competitive with the yields offered by risk-free Treasury securities.

‍

Charles Gaffney, Managing Director at Morgan Stanley Investment Management and Portfolio Manager of the Eaton Vance Dividend Builder Fund (EIUTX), explains that declining rates influence the broader financial ecosystem.

‍

“When the Fed lowers rates, money market yields start to decrease as well,” he notes. For instance, the Crane 100 Money Fund Index now offers an annualized seven-day yield of 4.27%, a noticeable drop from 5.13% in July. As of late December, money market fund assets totaled $6.81 trillion, according to the Investment Company Institute.

‍

In addition to rate cuts, other developments in 2025 could support dividend-paying stocks. President-elect Donald Trump has proposed reducing the corporate tax rate to 15%, down from the current 21%. If implemented, such a change could significantly improve corporate cash flows, potentially leading to higher dividends, share buybacks, and increased merger activity, Gaffney suggests.

‍

Traditionally viewed as stable and mature companies with limited growth prospects, dividend-paying stocks have seen an unusual transformation in 2024. Major tech firms like Meta Platforms, Salesforce, and Alphabet introduced dividend payments this year, signaling a shift in how growth-oriented businesses engage with shareholders.

‍

While the dividend yields of these tech giants remain modest—for example, Meta’s 50 cents per share equates to a 0.3% yield—they provide long-term investors with both price appreciation and the potential for future dividend increases. Reinvesting these dividends can further amplify compounded returns. Cheryl Frank, Portfolio Manager at Capital Group Conservative Equity ETF (CGCV), highlights this shift: “These new dividend payers are excellent companies just starting their journey. It’s a meaningful change in the market.”

‍

The utility sector also made waves in 2024, fueled by its role in supporting artificial intelligence (AI) infrastructure. Companies like Constellation Energy and Vistra have seen remarkable stock performance due to their contributions to AI-powered data centers. Constellation Energy, which plans to restart the Three Mile Island nuclear plant by 2028 to supply Microsoft, has nearly doubled its stock value. Meanwhile, Vistra’s shares have soared by over 270% this year, driven by its potential to provide nuclear energy for AI applications. Both firms offer dividend yields of 0.6%.

‍

Frank explains that after two decades of stagnant electricity demand, the landscape is changing due to trends like electric vehicle (EV) adoption and the energy-intensive AI boom. She also emphasizes that sectors such as utilities, consumer staples, and health care still present opportunities to find reasonably valued companies.

‍

Looking ahead, certain dividend-paying stocks stand out for their potential. Broadcom, a semiconductor firm, is among Gaffney’s top picks. The company’s shares more than doubled in 2024, with a dividend yield of 1%. Broadcom’s CEO, Hock Tan, estimates that the total market for its AI chips and networking components could reach $60 billion to $90 billion by 2027. Gaffney views this as a robust growth opportunity, adding, “The runway for Broadcom’s growth is extremely strong.”

‍

Another notable choice is EOG Resources, an energy company included in the Eaton Vance Dividend Builder Fund’s portfolio. While the stock remained relatively flat in 2024, it offers a 3.2% dividend yield. Gaffney describes EOG as a well-managed company operating with a growing dividend rate in the high single digits. Additionally, EOG’s strong capital generation allows it to issue special dividends alongside its regular payouts. These non-recurring dividends can elevate the total yield closer to 4%.

‍

Gaffney acknowledges that EOG’s inclusion in his fund is somewhat contrarian, given the energy sector’s limited participation in 2024’s broader market rally. Nevertheless, he remains optimistic, citing the company’s consistent performance and ability to reward shareholders with additional dividend income.

‍

Beyond individual stock selections, broader market conditions in 2025 are expected to favor dividend-paying investments. The ongoing decrease in interest rates will likely continue to shift investor preferences toward equities that offer reliable income. Simultaneously, potential corporate tax reforms could further strengthen the financial position of dividend-paying companies, enabling them to enhance shareholder returns.

‍

As new entrants like tech giants redefine what it means to be a dividend stock and established sectors like utilities find renewed growth through emerging technologies, dividend-paying equities are poised to remain an attractive option. For investors, this blend of stability, income, and growth opportunities provides a compelling case for allocating capital to these stocks in the year ahead.

‍