Stocks that pay growing dividends are starting look more attractive as bond yields have dropped.
The 10-year Treasury yield is down to about 3.9% from October’s multiyear peak of about 5%. The rate of inflation has continued to decline, and the Federal Reserve is now more likely to cut short-term interest rates than lift them. These dynamics are dragging the 10-year yield downward.
Fatter yields from stock dividends now beckon. Stocks held for their dividends typically pay higher yields than bonds to compensate investors for the risk involved with equities, as opposed to risk-free government debt. When yields on government debt fall, investors often begin diverting money into stocks that pay high dividends, pumping the share prices higher.
That’s exactly what has happened.
The
Utilities Select Sector SPDR
exchange-traded fund is up about 14% from a low point hit in early October, while the
Vanguard Consumer Staples
ETF is up around 8% from a similar low.
Of course, these stocks need bond yields to keep dipping in order for the share prices to keep rising. That could certainly happen as the rate of inflation is still just over 3%, with the Fed looking for it to drop to around 2%.
“Expect this basket [of dividend stocks] to keep working as interest rates decline,” writes 22V Research’s Dennis Debusschere.
But even without a continued drop in bond yields, many dividend stocks look attractive simply for their stream of payments to come over the years.
That’s why we screened for
S&P 500
stocks in the highly stable utilities, staples, and healthcare sectors that have forward dividend yields of at least 2.5%, and have grown their dividend payments for at least the past 10 years. They key is that investors can rely on the consistent stream of profits and be confident that the dividends will continue to grow. Increased dividends mean that the average payment over a period of many years from now will probably equate to a yield that’s much higher than today’s 10-year Treasury yield.
The screen includes
Colgate Palmolive,
Amgen,
Philip Morris International,
Consolidated Edison,
Hershey,
Coca-Cola,
and
AbbVie.
Colgate-Palmolive stock has a forward one-year dividend yield of about 3.5%. The chances that the company will continue increasing its dividend are pretty strong; earnings should grow moderately, whether or not the economy slows down, as people will always buy dish soap and toothpaste.
Sales can grow just over 3% to about $20 billion, according to FactSet. As the rate of price increases moderates, the volume of products sold should stabilize, a dynamic the company called out at a consumer conference this month. Management mentioned that it has recently launched large advertising campaigns to keep its brands competitive, which is why analysts expect operating margins to rise next year, contributing to just over 6% bottom-line growth. That should help bolster the dividend.
Well-established biotech Amgen has a 3.3% forward dividend yield.
Amgen also has growing drug revenue, and can offset products that are in decline as a result of patent expirations and falling market share. Repatha, an immunotherapy for hyperlipidemia, is one such treatment on the rise. Analysts expect total company sales to grow about 5.5% annually for the next four years to just over $34 billion in 2027. Earnings should grow in line with that, boosting the dividend payment.
These stocks are the best ways to play the dividend theme going forward.
Write to Jacob Sonenshine at [email protected]
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