Dividends Premium: February 2025

Inflation Isn’t Licked but Strong Company Results are Powering Returns

Happy Valentine’s Day and a warm welcome to your February edition of Dividends Premium!

This month as you’ll see, I’m basically standing pat with the portfolio, following the additions we made in January. One big reason: Q4 earnings and guidance updates have been coming in strong for our companies. And there’s every indication from guidance they will the rest of the year as well.

The direction of interest rates will still be a key factor setting the tone for dividend stock performance in 2025, just as it’s been the past few years. And these days, it seems every move or statement from the Trump Administration can shift investor expectations for the Federal Reserve’s next move, as much as the hard data.

I think the Fed will do pretty much what it said following December’s rate cut. That’s in the words of Chairman Jerome Powell “restraint for longer.” And until the central bank’s preferred inflation gauge comes down enough—or an economic event such as a stock market collapse forces more dramatic action—benchmark rates will stay about where they are now.

On the other hand, if the year’s first six weeks or so have shown us anything, it’s that investors are once again paying more attention to individual company results. And if our companies outperform on earnings, their stocks will do so as well.

We saw it with the big gain yesterday in long-time laggard CVS Health Corp (NYSE: CVS), as that company presented compelling evidence its turnaround is accelerating. I expect similar favorable surprises for every member of this portfolio as we get deeper into 2025. And that definitely includes this month’s two top fresh money picks.

Inflation Isn’t Licked but Strong Company Results are Powering Returns

Will the Trump Administration’s new tariffs on imports from America’s biggest trading partners trigger more US inflation? Could they slow down the US economy, by taking money out of the hands of consumers and business?

Alternatively, will they create jobs and swell the Treasury’s coffers, as the president and his followers say they will? Or are tariffs really just a temporary negotiating ploy that will lead to better deals on trade, as many on Wall Street are hoping?

It looks like we may find out the combination of outcomes—some widely anticipated, others likely surprises—later this year. But as this week’s unexpectedly large increase in the January Consumer Price Index showed once again, US inflation remains stubbornly high, and without any help from Trump.

The annual CPI inflation rate of 3.3 percent—excluding food and energy prices—is still less than half the peak levels for the cycle so far in 2022. But inflation is plenty high to justify the “restraint for longer” strategy Federal Reserve Chairman Jerome Powell restated in advance of the CPI release. And barring a substantial drop in coming months, there’s no reason to doubt the Fed’s December forecast for just two quarter point cuts in the Fed Funds rate this year.

All bets are off, of course, in the even of a major economic event, such as a stock market crash. The Powell Fed has told us again and again that it’s “data driven.” But the data point it’s always responded to is the health of investment markets. And that’s for good reason: A drop of more than 25 percent in the S&P 500 and other major averages has frequently presaged a recession.

Investors should certainly be prepared for a major stock market correction this year. And this portfolio is, thanks to focusing on companies with strong balance sheets and underlying businesses, collecting high and growing dividends and holding a still hefty holding of cash.