Today the benchmark indices closed up over 1% as Wall Street celebrated the recent release of the minutes from the Federal Reserve’s latest policy meeting. The spark notes version is that the Fed recognizes the financial market’s sensitivity to interest rates and the central tread with extreme caution when it comes time to raise them. So we shouldn’t look for any significant rate hikes anytime soon. The news came as a relief to many investors, particularly those that rely upon dividend income.
Why dividends? Well, the current low-rate environment has made dividend stocks all the more attractive. After all, with 10-year Treasurys yielding just 2.7% and banks paying a pittance on savings accounts, it’s hard to measure up to stocks. The average dividend yield for the S&P 500 is 1.94%, and that’s not counting the capital gains you could get once you’ve sold the position.
Of course, all that could change once the Fed hikes up interest rates. Everyone knows that interest rates move in the opposite direction of bond prices, and the same is true for the value of high-yield stocks. This is because when interest rates rise, the value of future cash flows must be discounted at a higher rate. It’s this free cash that is put towards shareholder perks like dividends.
With dividend stocks not being as valuable as before, this would put downward pressure on prices. Of course, there is an exception for every rule. In this case, companies that can be expected to increase their dividends year after year, no matter what happens with interest rates, would be an income investor’s best bet.
All this talk about the Fed and the general obsession over rates has me looking at just these kind of stocks. Now, that’s not to say that you should start loading up on all companies known for dividend hikes. There are a number of other considerations that can’t be ignored, like whether the company’s financials are strong enough to maintain its strong dividend track record.
And with first-quarter earnings season just starting, it’s extremely important that all stock pickers keep this in mind. To get you started, I’ve run 19 of Wall Street’s leading dividend payers (in terms of yield and track record) through Portfolio Grader. As you’ll see below, two of the 19 make the cut by being good buys at current prices right now:
|Ticker||Company Name||Dividend Yield||My Take|
|ADP||Automatic Data Processing||2.63%||Hold|
|FDO||Family Dollar Stores||2.11%||Sell|
|KO||Coca Cola Co.||3.14%||Strong Sell|
|PG||Procter & Gamble||3.16%||Sell|
|WMT||Wal-Mart Stores||2.46%||Strong Sell|
Those of you who follow my Blue Chip Growthnewsletter should already know the two buys on my list:
PPG Industries (PPG) supplies paints and coatings. PPG Industries has several key businesses outside of performance coatings, including adhesives, commodity chemicals and fiber glass. PPG Industries also produces paints and stains for commercial and residential markets, but the bulk of this company’s products are designed for aerospace, automotive, defense and industrial applications.
PPG also pays out one of the highest dividends in the industry—with a 1.2% annual yield. The company has a strong dividend track record, having declared uninterrupted dividends since 1890 and with 58 years of consecutive dividend increases. Most recently, the company hiked up its quarterly dividend by 7% to $0.6436 per share.
McGraw Hill Financial (MHFI) provides valuable services to the financial markets: Ratings, benchmarks and analytics. The company operates in four main segments: Standard & Poor’s Ratings (S&P Ratings), S&P Capital IQ, S&P Dow Jones Indices (S&P DJ Indices), and Commodities & Commercial (C&C). McGraw Hill serves a wide range of customers, including commercial banks, analysts, mutual fund operators, and individual investors. I probably don’t need to tell you twice that people will pay good money for good information about the capital and commodities markets.
MHFI also pays a solid 1.6% dividend. Back in January the company also approved a 7% increase in the quarterly cash dividend to $0.30 per share. With the latest increase the company has a 41-year winning streak of dividend hikes.
I have high hopes for both of these companies as we near their respective earnings announcements. Current Blue Chip Growth readers can look forward to regular commentary and specific buy instructions on these stocks. If you’re not currently a Blue Chip Growth member but would be interested in learning more about joining, you may visit here.