When the Federal Reserve finally starts to raise interest rates, the smartest investors will own these three dividend stocks.
They’re the highest quality stocks available in the market.
In fact, they are the only three stocks that can make that claim.
Let’s take a look at them…
Since the Federal Reserve’s recent meeting minutes release, we know that it considered raising interest rates—which hasn’t happened since 2006—but decided instead that it was “prudent to wait.”
With the decision now official, it’s time for investors to come to some conclusions about what to do next despite some basic uncertainties.
To start with, investors don’t know by how much those rates will rise when the time comes, and for how long the Fed will raise them.
And of course, we have no real idea (just a lot of academic research and speculation) on what a rate raise will mean for the stock market.
Here’s what we do know…
What we know:
Through deflation, inflation and boom/bust, dividend stocks perform better across the long-term than the universe of stocks that don’t pay dividends. Period.
Let’s start with that as a base for what to do next.
Investors should find the best dividend stocks for the long term.
What makes the best?
It’s subjective of course, but the definition for most rests on the quality of the dividend stock.
How long has the company paid a dividend, and more importantly, for how long has that dividend increased on an annual basis?
While answering those questions, investors should also ask how strong the company is financially. After all, we want to believe those dividends will be available.
Fortunately both those questions are easily answerable, and lead us to an easy answer on what 3 stocks to own for the long, long term…
The 3 best dividend stocks are:
Exxon Mobil , Johnson & Johnson and Microsoft.
We’ll start with the first criteria: dividend history.
Dividend Aristocrats are those companies who’ve managed to increase dividends for a minimum of 25 years.
On that score, both Exxon and Johnson & Johnson meet the requirement.
While Microsoft’s dividend is only 12 years old, and they did miss an increase in one year during that period, it’s only a matter of time before we can call Microsoft an Aristocrat. It will get there.
As for credit quality, all three have something nobody else out there does: A “AAA” credit rating from Standard & Poor’s.
It is the highest rating S&P doles out, and it means these guys are rock solid.
Now let’s look at why all 3 need to be in your long-term portfolio…
EXXON MOBIL (XOM)
Exxon (XOM) has delivered increasing annual dividend checks since 1983, with its latest a 5% bump in May that moved its payout to $2.92 per year.
With XOM stock sitting right on about $80 per share, that provides investors with a juicy 3.65% dividend yield.
For those of you worried about the continued drop in oil putting a dent in XOM, don’t cry for Exxon…
There isn’t any phase or operation in the oil and gas sector in which Exxon doesn’t have a stake. Exxon is involved in the exploration, production, transportation, and sale of petroleum and natural gas, manufactures and markets petrochemicals, and runs them all on a global scale.
Exxon is world famous for its management’s efficiency. With a (trailing 12 months) return of assets of 9.66%, and return on equity of 13.33%, Exxon crushes its global competitors Chevron (CVX) at 1.46% and 7.92%, respectively, and Royal Dutch Shell (RDS.A) with 4.55% and 8.45%, respectively.
Exxon’s market capitalization is $330 billion, roughly the value of Chevron and Shell combined. Its sheer scale gives it market clout and moats unavailable to competitors.
Regardless of how much lower oil falls, investors can bet that Exxon will continue to pump out profits, dividends and that solid gold credit rating for the long term.
JOHNSON & JOHNSON (JNJ)
Johnson & Johnson (JNJ) is is now in it’s 53rd year of annual dividend increases.
Its recent 7% bump to $3.00 per share annually came in May, and today provides investors with a very sweet 3.16% dividend yield.
If Exxon is the king of oil, Johnson & Johnson is the king of the pharmaceuticals industry. It is the largest publicly traded healthcare company, and the sixth largest company in the U.S. with a market cap of $300 billion.
J&J is broken into three segments: Consumer, Pharmaceutical and Medical Devices. No one of the segments accounts for more than 44% of revenues (Pharmaceuticals), while none is less than 19% (Consumer).
Its consumer product brands are among the most well known in the world, including BenGay, Listerine, Tylenol, Band-Aid, Nicorette and Pepcid.
In keeping with its rich history, the list of brand products is expected to continue on ad infinitum.
Its top pharmaceutical products include Remicade, Olysio, Stelera, Zytiga and Prezista. That they produce less than 50% of overall pharmaceutical revenues shows just how deep a bench JNJ has in this segment.
Meanwhile, the medical devices group includes cardiovascular and diabetes care, diagnostics, orthopedic, and surgical and vision care products. Again, a deep reservoir of products provides tremendous diversification.
Johnson & Johnson’s incredible product mix across three separate business segments provides it with enough diversification that no one product flop—and there will be flops in any business—will leave it in a position to lose that AAA rating anytime soon.
JNJ is a must-have long-term holding.
MICROSOFT (MSFT)
Here’s the baby of our three dividend companies for the long term… but it is growing up very, very fast.
After a decade of languishing with a faltering stock price, unhappy investors, and a product lineup that could not find a mobile strategy until it was almost too late, new Microsoft (MSFT) CEO Satya Nadella has rallied the troops and reconstituted “Mr. Softy” into a lean, mean, high-tech behemoth.
Nadella’s magic has boosted morale and Microsoft’s stock price and dividend growth. A recent 16% boost has the dividend payout at $1.44 per share annually, and a dividend yield just over 3%.
Yes, Nadella’s mobile-first magic is finally making headway across a broad swath of Microsoft businesses, and its most recent Surface product announcement were met with glee from a range of reviewers and users. Consider this from Evan Niu at Motley Fool, and this review from Brad Moon at InvestorPlace as starting points.
Microsoft’s also recently changed up its reporting structure to better match up with Nadella’s business model, releasing this statement on the subject:
Microsoft Corporation today announced that it will change the reporting of its financial results to reflect the company’s strategy and ambitions to build best-in-class platforms and productivity services for a mobile-first, cloud-first world. Beginning in fiscal year 2016, the company will report revenue and operating income based on three operating segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
Microsoft is once again on the move, and with its combination of the AAA credit rating and commitment to dividends, has earned a spot along with Exxon and Johnson and Johnson as a long-term hold against any Fed interest rate moves.
As of this writing Marc Bastow was long JNJ, MSFT and XOM.
This post originally appeared on mainstreetinvestor.com.
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