With the Federal Reserve having kept interest rates at historical lows near 0% for more than three years now, many stocks kick out dividend yields far in excess of what you get in savings accounts, CDs and money market funds.
One thing we can be sure about is the direction interest rates will go next: It has to be up.
It’s less certain how fast they will move and how long the move will last, but we’ve seen rates start to move a little bit recently. The yield on 10-year U.S. Treasuries rose from 1.87% at the end of last year to a high of 2.4% last month; it currently is around 2.2%.
Does the prospect of higher interest rates make dividend-paying stocks less attractive? No. We are moving toward the point where interest rates could become more competitive, but there are enough concerns around the world to keep the safety of Treasuries appealing to investors, which should keep yields from rising in a hurry. As a result, many good stocks still have higher yields than 10-year Treasury notes, and I expect that to hold true for a while.
That might not be the case further out in, say, two years, and that’s why it’s important to look for more than yield in dividend-paying stocks. You also want to look for companies that consistently increase their dividends. A company yielding 2% today that increases its dividend each year will often be a better buy over the long term than a stock with a 3% yield but a flat dividend.
Another reason: Companies only raise dividends if they are comfortable with their outlooks, thereby increasing the probability the stock will increase in value while you collect the dividends.
Here are four U.S. blue chips worth a look right because they have solid yields, strong histories of raising dividends and promising outlooks:
Global food giant General Mills (NYSE:GIS) yields an attractive 3.1%, and it’s a yield you can count on. General Mills has paid a dividend for 113 years, never lowering it. Over the last five years, the dividend has jumped from 72 cents to $1.12, an average increase of 10.5% a year. The company’s fiscal year ends in June, and for the last eight years (2004-11), GIS has raised the dividend at that time.
The stock itself is in good position to move higher, too, given that General Mills finally is executing its international strategy. Third-quarter net international sales grew 51% to $1.04 billion. Commodity prices were an overhang in the last earnings report, but they should moderate, and the company was able to pass the price increases to consumers, a sign of strength. General Mills also is adept at finding growth organically — like creating new consumer segments such as healthy snacks.
Another food company is Campbell Soup (NYSE:CPB). Earnings have struggled a bit in recent years, but cash on the balance sheet is $322 million, which bodes well for the current 3.4% dividend yield. The company also has raised the dividend steadily, growing an average of 7.7% annually over the last five years.
As with every packaged goods company, commodity prices have impacted Campbell’s, too. The most recent quarterly results were disappointing. A 1% sales decrease reflected higher commodity prices, weakness in Canada, Europe and Australia, as well as the cost of expanding into China. Going forward, commodity prices should moderate, and in the meantime, CPB remains a very profitable business. Margins are wider than other food sectors, and V8 juice product extensions have helped to grow the beverage business. Campbell’s also has identified areas of weakness that need improving — namely, the company is investing in building brands through consumer promotions, advertising and competitive pricing.
There might not be as much upside potential in the stock as with GIS, but CPB remains a solid business and a dividend stalwart.