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Wall Street analysts don’t always make accurate predictions, but Tom Lee from Fundstrat Global Advisors has put together a string of impressive calls over the last couple of years. He said the S&P 500 index would hit 4,750 in 2023, and it closed the year at 4,769. He then predicted the S&P would hit 5,200 in 2024, which was the most bullish target on Wall Street at the time, and it surpassed that level within the first three months.

Lee also forecast a 50% gain this year for the Russell 2000, an index featuring approximately 2,000 of the smallest companies listed on U.S. stock exchanges. The potential for falling interest rates combined with cheap valuations are two key reasons for his prediction.

The Russell 2000 hit its high point for 2024 (so far) on July 16, and Lee came out on that very day and reiterated his bullish stance in an interview on CNBC. But the index has been trading down since then, and it’s sitting on a gain of just 10% for the year. That means it will have to climb by another 37.1% within the next four months to hit Lee’s target.

While that seems unlikely, the Vanguard Russell 2000 ETF (NASDAQ: VTWO) closely tracks the performance of the index, so it’s a simple way for investors to profit from Lee’s prediction if he turns out to be right.

The Vanguard ETF is a simple way to invest in small-caps

The composition of the Russell 2000 is very different from mainstream indexes like the S&P 500. The industrial sector is the largest in the Russell with an 18.9% weighting, followed by the healthcare sector at 15.1% and the financial sector at 15%. The largest sector in the S&P 500, on the other hand, is technology, with a sizable 31.4% weighting thanks to the rise of trillion-dollar tech giants like Apple, Microsoft, and Nvidia.

Plus, the top 10 holdings in the Vanguard Russell 2000 ETF represent just 3.2% of the total value of its portfolio, so its performance isn’t beholden to a handful of stocks:

Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2024, and are subject to change.

Insmed is a biotechnology company that develops therapies for rare diseases. It has a market capitalization of just $13.1 billion, and as the largest holding in the Vanguard ETF, it puts the size of the Russell 2000 companies in perspective.

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Sprouts Farmers Market, on the other hand, is a grocery chain with over 400 stores (and growing) across America. It specializes in healthy and organic foods. Then, there is Fluor, a construction and engineering company that builds energy and urban infrastructure.

Outside of its top 10, the Vanguard ETF also holds popular names like clothing retailer Abercrombie and Fitch, cybersecurity powerhouse Tenable, and semiconductor-service company Axcelis Technologies. Simply put, the ETF (and, by extension, the Russell 2000) is very diversified.

Falling interest rates should benefit small-caps

“The time has come for policy to adjust.” Those were the words of Federal Reserve chairman Jerome Powell at the Jackson Hole Economic Symposium last month. The Fed has been locked in a battle to tame high inflation for the last two years, which saw the federal funds rate climb to a 23-year high of 5.33% in 2023, where it remains today.

But with the Consumer Price Index measure of inflation nearly back to the Fed’s 2% annualized target, the central bank looks set to cut rates at its next meeting on Sept. 17 and 18. In fact, according to the CME Group‘s FedWatch tool, there could also be cuts in both November and December.

Lower interest rates tend to benefit small companies more than their larger counterparts. Behemoths like Apple, Microsoft, and Nvidia are sitting on so much spare cash that they each return tens of billions of dollars to shareholders every year through dividends and stock buybacks. In other words, they don’t need to rely on debt financing.

Smaller companies, however, often borrow money to fuel their growth, and they tend to carry a high amount of floating-rate debt, which is highly sensitive to changes in interest rates. Falling rates will increase the borrowing capacity of small-cap companies and reduce their interest payments which will be a direct tailwind for their earnings.

Lee thinks those factors could also drive the valuation of the Russell 2000 higher. Right now, the index trades at a price-to-earnings (P/E) ratio of 17.7 (excluding companies with negative earnings), which is much cheaper than the S&P 500, which trades at a P/E ratio of 27.4.

With that said, investors pay a premium for the S&P 500 because of the quality of its constituents like Nvidia, Apple, and Microsoft, which have long-term track records of success, secure revenue streams, and fortress balance sheets. It’s possible the Russell 2000 will trade at a higher valuation when interest rates fall, but I don’t expect it to completely close the gap with the S&P.

Will Tom Lee be right?

Lee’s prediction for a 50% return in the Russell 2000 this year is ambitious. In fact, going all the way back to 1988, the index has never recorded an annual gain of 50% or more.

The Vanguard Russell 2000 ETF has delivered a compound annual return of 10.4% since its inception in 2010, so a 50% move would be highly unusual. That also represents a notable underperformance relative to the S&P 500, which has delivered a compound annual return of 13.7% over the same period.

Keep in mind that the federal funds rate was below 1% for the majority of the period between 2010 and 2022, and that wasn’t enough to propel the Russell to outsized returns. The Russell 2000 could climb further in the remainder of 2024, but it’s unrealistic to expect a 37.1% gain from here to reach Lee’s year-end target.

With that said, small caps might be a good place to invest some money as interest rates fall, so adding the Vanguard Russell 2000 ETF to a balanced portfolio isn’t necessarily a bad move.

Should you invest $1,000 in Vanguard Russell 2000 ETF right now?

Before you buy stock in Vanguard Russell 2000 ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Russell 2000 ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $661,779!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and SPS Commerce. The Motley Fool recommends CME Group, Sprouts Farmers Market, and UFP Industries and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

1 Vanguard ETF That Could Soar 37.1% Before the End of 2024, According to a Select Wall Street Analyst was originally published by The Motley Fool

Savvy investors often look to billionaire portfolios for quality dividend stock ideas. Ray Dalio, founder of Bridgewater Associates, has a stellar reputation for spotting promising investments. Despite Dalio’s retirement in 2022, his influence remains evident in the hedge fund’s recent moves.

In the second quarter of 2024, Bridgewater Associates purchased shares of three tier 1 dividend stocks: ExxonMobil (NYSE: XOM), Medtronic (NYSE: MDT), and Microsoft (NASDAQ: MSFT). Let’s examine each of these stocks to determine if they deserve a place in your dividend portfolio.

ExxonMobil: An energy giant with an attractive yield

ExxonMobil, one of the world’s largest integrated oil and gas companies, has long been a favorite among dividend investors. The company offers a compelling yield of 3.29% with a conservative payout ratio of 44.9%. Over the past decade, ExxonMobil has grown its dividend at a modest rate of 2.66% annually.

The stock’s performance has been mixed, with a 10-year return of 16.5% excluding dividends. However, when including reinvested dividends, the total return jumps to 80.1%. While impressive, this still lags the S&P 500‘s total return (including dividends) of 231% over the same period. ExxonMobil currently trades at an attractive forward price-to-earnings (P/E) ratio of 12.1.

Upside catalysts for ExxonMobil include its response to shareholder concerns, such as reduced spending, new board appointments, and emission reduction targets. The company’s shift toward liquids pricing and high-value integrated operations could improve cash margins, particularly with new volumes from the Permian Basin and Guyana.

However, ExxonMobil faces significant downside risks. The company’s continued investment in long-life hydrocarbon projects could lead to stranded assets if oil demand peaks and declines sooner than expected. Additionally, ExxonMobil’s relatively low investment in low-carbon businesses compared to peers may pose challenges in adapting to a changing energy landscape.

Medtronic: A top healthcare innovator

Medtronic, a global leader in medical technology, offers a compelling combination of stability and growth potential. The stock yields 3.15%, although its high payout ratio of 93.2% may raise some eyebrows. Over the past decade, Medtronic has grown its dividend at a healthy rate of 6.3% annually.

The company’s stock performance has been modest, with a 10-year return of 38.3% excluding dividends and a total return of 75.7% including reinvested dividends. Like ExxonMobil, this trails the S&P 500’s performance. Medtronic trades at a forward P/E ratio of 16.3.

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Medtronic’s upside potential stems from its dominant market position in core heart devices, spinal products, insulin pumps, and neuromodulators. The company’s robust pipeline, including treatments for atrial fibrillation, mitral valve disease, and renal denervation for hypertension, could open up new large markets. Medtronic’s innovative approach to applying familiar technologies to new medical challenges is another strength.

On the downside, Medtronic faces increasing competition in the insulin pump market, which could threaten its leadership position. The company is also indirectly subject to Medicare reimbursement rates, and increasing pressure on payments could hurt profitability. Product recalls, although infrequent, remain a concern that requires ongoing attention and resources.

Microsoft: A tech giant with a growing dividend

Microsoft might not be the first name that comes to mind for dividend investors, but the tech giant has been steadily increasing its payout. The stock offers a modest yield of 0.73% with a conservative payout ratio of 24.8%. Over the past decade, Microsoft has grown its dividend at an impressive rate of 7.6% annually.

Where Microsoft truly shines is in its stock performance. The company has delivered a staggering 10-year return of 810% excluding dividends, and a total return of 965% including reinvested dividends. This significantly outperforms the S&P 500. Microsoft trades at a premium forward P/E ratio of 30.8, reflecting high growth expectations.

Microsoft’s upside potential is driven by its strong position in the public cloud market with Azure, which is benefiting from the evolution to hybrid and public cloud environments. The continued success of Microsoft 365, with customers willing to pay for better security and additional features, is another growth driver. Microsoft’s dominant positions in operating systems and office software serve as cash cows to fuel growth in other areas.

However, Microsoft faces some downside risks. The momentum in shifting to subscriptions is slowing, particularly in mature products like Office. The company lacks a meaningful mobile presence, which could be a disadvantage in an increasingly mobile-first world. Additionally, Microsoft is not the top player in some of its key growth areas, notably Azure and Dynamics, which could limit its potential in these markets.

Should you follow Bridgewater’s lead?

Dalio‘s Bridgewater Associates has been buying three diverse dividend stocks, each offering unique attributes for income-focused investors. ExxonMobil provides a high yield and long dividend history, but it operates in a rapidly changing energy sector. Medtronic offers stability and growth potential in the high-growth healthcare industry. Microsoft, while offering a lower yield, sports a strong dividend growth record backed by a powerful tech business.

Are these dividend stocks worth buying? For income investors, ExxonMobil, Medtronic, and Microsoft are always worth considering. These three companies have shown a rock-solid commitment to rewarding shareholders with regular dividend payments and increases to their quarterly cash distributions. They also sport entrenched market positions, ensuring long-term profitability.

So, if you’re looking for a trio of top dividend stocks to add to your portfolio, these three Bridgewater Associates holdings may be worth a closer look.

Should you invest $1,000 in Microsoft right now?

Before you buy stock in Microsoft, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $661,779!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends Medtronic and recommends the following options: long January 2026 $395 calls on Microsoft, long January 2026 $75 calls on Medtronic, short January 2026 $405 calls on Microsoft, and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.

Billionaire Ray Dalio’s Former Hedge Fund Is Buying These 3 Top Dividend Stocks. Should You? was originally published by The Motley Fool

The U.S. may be home to some of the world’s biggest investors, but unlike other countries such as Saudi Arabia and Singapore, the federal government doesn’t have an investment arm of its own.

That might change if Donald Trump is elected to a second term as president. Speaking at the Economic Club of New York on Thursday, Trump called for the creation of a sovereign wealth fund—a term that describes state-owned organizations that operate like hedge funds or private equity firms, pursuing different financial strategies such as buying up stock in public companies or backing startups and other private companies.

In his remarks, Trump kept the proposal vague, saying the fund would invest in “great national endeavors for the benefit of all of the American people” and arguing that other countries have sovereign wealth funds, but “we have nothing.” He added that the government could call its investing firm something other than a “sovereign wealth fund,” which, he said, may not be “appropriate.”

A history of sovereign wealth

While Trump may be looking to other countries as inspiration for his idea, the creation of sovereign wealth funds has typically coincided with budget surpluses, often as a result of oil booms. One of the first examples was Kuwait, which created an investment authority in 1953, followed by Norway’s Norges Bank Investment Management in 1967, and the Abu Dhabi Investment Authority in 1976; all three managed surplus oil revenue.

Even the U.S. has its own homegrown fund born out of oil money, with Alaska establishing one in 1976 that has yielded an annual payout to every state citizen since 1980. In 2023, every Alaskan—including children—received $1,312.

In recent years, sovereign wealth funds—especially from Asia and the Middle East—have become major players in the tech industry. Temasek, a Singaporean investment company that counts the country’s government as the sole equity shareholder, has backed top public companies such as Microsoft and Nvidia, as well as private companies—including, disastrously, FTX. Temasek also backs other funds, including the OpenAI investor Alpha Intelligence Capital, which is closing a $250 million second fund.

Another prominent example is Saudi Arabia’s Public Investment Fund, which owns a venture arm called Sanabil. Top U.S. funds including Andreessen Horowitz, Coatue, and KKR have drawn scrutiny for receiving Saudi capital from Sanabil, especially after the assassination of journalist Jamal Khashoggi by agents of the Saudi government.

‘America First’

Without additional context from Trump, it’s unclear how the U.S. sovereign wealth fund he proposed would operate, especially without a clear source of funding—or direction for capital investments.

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Matt Bruenig, a progressive lawyer and founder of the think tank People’s Policy Project, has previously proposed a “social wealth fund for America,” about which he posted again on X after Trump’s remarks. Under Bruenig’s plan, the fund would tackle wealth inequality by issuing every American a share of ownership and accumulating assets such as stocks, bonds, and real estate. Citizens would not be permitted to sell their shares, but would earn a universal basic dividend, similar to the Alaskan model.

The sovereign wealth fund was not the only proposal from Trump in his speech on Thursday. He also announced that he would establish a “government efficiency commission” headed by Elon Musk that would be tasked with completing an audit of the government.

“I look forward to serving America if the opportunity arises,” Musk posted on X.

This story was originally featured on Fortune.com