Yesterday, Wall Street celebrated the release of the minutes from the Federal Reserve’s latest policy meeting. The short version is that the FOMC didn’t raise rates this month, and expects to raise rates just two times this year—down from the previously projected four times.
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 Treasuries yielding just 1.9% 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 2.14%, and that’s not counting the capital gains you could get once you’ve sold the position.
Of course, that spread will shrink as the Fed continues to hike 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 kinds 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.
So I strongly recommend that before you consider buying a dividend-paying stock, you run it through Portfolio Grader and Dividend Grader. By doing so, you’re covering all of the bases in assessing a company’s underlying fundamental health, as well as its income potential.
To get you started, I’ll share with you two of my top "double whammy" stocks—these two stocks rate highly in both Portfolio Grader and Dividend Grader, and I currently recommend them in a few of my advisories.
Home Depot Inc.
The Home Depot Inc. (HD) is the world’s largest home improvement retailer. From air conditioning units to gardening supplies to home appliances to electrical fixtures, this store is a one-stop-shop for all your home improvement needs. And with some help from the ongoing housing recovery, Home Depot is an A-rated stock in my Portfolio Grader tool.
In the topsy-turvy market we’ve seen recently, though, no company’s stock can post double-digit gains over the past six months simply on the promise of an industry-wide recovery. Home Depot has revealed its own solid fundamentals over the past four quarters as well. In fact, it kicked off 2016 with a better than 6% earnings surprise in February.
Take into account quarterly revenue growth of more than 6% and quarterly earnings growth of better than 14%, and you can start to see why I like this stock so much. All the while, Home Depot knows how to reward its shareholders. The company is in the middle of buying back $18 billion of its stock back, and it pays a dividend of $2.76 per share each year. At current prices, HD has a generous 2.1% dividend yield.
So regardless of what happens with the Fed, Home Depot would be an excellent choice for your portfolio.
Hormel Foods Corp.
Hormel Foods Corp. (HRL) is an immediately recognizable name in grocery store aisles. While the company is best known for its namesake meat products, it has a diverse portfolio of products that include Skippy peanut butter, CHI-CHI’s salsas, Muscle Milk protein drinks, Stagg chili and SPAM. Its Specialty Foods division offers high-quality food products and supplements to restaurants, retail and health care facilities. The company exports its products to more than 50 countries, including China, Australia, Japan and South Korea, as well as throughout Europe.
Hormel Foods diverse product offerings and large global footprint have added nicely to the company’s bottom line. For the past four years, Hormel Foods has achieved at least 11% annual EPS growth. Most recently, the company reported that adjusted earnings jumped 23% to $0.43 per share, which topped the consensus estimate for $0.37 by 16.2%. And the outlook for fiscal year 2016 remains just as strong. The company now expects earnings between $1.50 and $1.56 per share, up from its previous guidance of $1.43 to $1.48.
The company also has a strong history of rewarding its shareholders. For 50-straight years, Hormel Foods has increased its annual dividend. Recently, the company increased its dividend from $0.25 per share to $0.29 per share, a 16% increase. The stock currently yields about 1.3%. So, now is a great time to buy shares of Hormel Foods.
I have high hopes for both of these companies as we near their respective earnings announcements. Current Blue Chip Growth, Platinum Growth Club and Family Trust readers can look forward to regular commentary and specific buy instructions on these stocks. If you’re not currently a member of any of these services, but would be interested in learning more about joining, you may visit here.