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Dividend stocks look attractive with a volatile year that nets measly returns expected ahead

Traders work the floor of the New York Stock Exchange on August 23, 2019 in New York.

Don Emmert | AFP | Getty Images

Stocks may be at record highs, but 2020 has already proven to be a volatile year, leading a growing cohort of Wall Street strategists to recommend stable dividend-paying investments.

Favorite names recommended by the banks include Citgroup, Verizon and Cisco. There are also a bevy of exchange-traded funds which track the style.

Unlike growth stocks that have led the market’s record-long bull run, dividend stocks typically don’t offer dramatic price appreciation, but they do provide investors with a steady stream of income. This type of strategy can bode well for investors in a much riskier year ahead grappling with Middle East unrest, more China trade talks and a U.S. presidential election.

“Dividend strategies have increasingly become top of mind for investors that want to participate in the up market that continues but they want to be prepared for the volatility that feels like is around the corner,” said Todd Rosenbluth, head of ETF & mutual fund research at CFRA.

Wall Street analysts largely see much more modest returns in 2020 following a historic run last year that saw the S&P 500 soaring nearly 29%. The average year-end target for the benchmark comes to 3,345, a measly 2% gain, according to CNBC’s Market Strategist Survey. In comparison, a popular dividend-focused exchange-traded fund — iShares Select Dividend ETF — currently has a dividend yield of 3.6%.

“If returns are more muted, the income component of the total return is going to play a more meaningful role,” Rosenbluth said.

Time to shift

Since the end of 2019, a slew of top financial institutions including Goldman Sachs, UBS and Bank of America Merrill Lynch have started advising clients to buy dividend-paying stocks and strategies to hedge against rising risks and an aging bull market.

Investors seem to have already warmed to the idea. In the fourth quarter alone, dividend ETFs experienced more than $10 billion in new money, which was more than any other factor-oriented strategies, according to data from CFRA. The inflows came even as the stock market rallied into the year-end, a sign that investors were getting nervous.

“How to hedge against things going wrong? We now prefer utilities (pure domestic