Now that the election is over, the Federal Reserve seems set to begin raising interest rates again in December. Conventional wisdom suggests that rising rates could be bad news for many high-dividend stocks.
Bill McMahon, chief investment officer of dividend investment specialist firm ThomasPartners, says not all high-dividend stocks are at risk. Back in September, McMahon said that the high-dividend stocks that are most at risk are “bond-like” stocks.
What type of characteristics define a bond-like stock? Bond-like stocks pay a high yield but produce relatively low growth. That means that earnings and/or dividend growth is weak or nonexistent. Bond investors are typically looking for consistency and reliability, not growth.
Another thing to look out for is relative performance in recent years. Many bond-like high dividend stocks have performed relatively well in the low-rate environment.
On the other hand, high-dividend stocks that have made aggressive growth moves or that remain extremely undervalued are still solid plays in the current environment. Here’s a look at three options that shouldn’t feel much pain from a new Fed tightening cycle.
High-Dividend Stocks to Buy: Ford (F)
Dividend yield: 5.1%
The U.S. auto industry generated record sales of 17.47 million units in 2015. This year, the industry will probably come up just shy of a new record.
In Ford Motor Company (NYSE:F)’s Q3 earnings report, the company projected $10.2 billion in pre-tax profits in 2016. Those numbers would make 2016 one of the most profitable years in the history of the company.
Fears over increasing competition, European sales and margin pressures have investors skeptical of F stock. However, Ford has maintained its 15 percent U.S. market share year-to-date.
In addition, industry experts are expecting near record sales for several more years ahead. In the meantime, Ford is working on the next generation of long-range electric vehicles to compete in the next era of automobiles.
At under $12, Ford stock is currently trading at a forward price-to-earnings ratio of only 7. That’s certainly on the low end of its historical range, indicating downside is limited. Limited downside is exactly what dividend investors like to see ahead of a possible interest rate hike. With a yield of 5.1%, Ford is one of the safest high-dividend stocks in the market.
High-Dividend Stocks to Buy: Nokia (NOK)
Dividend Yield: 6.9%
Nokia Corp (ADR) (NYSE:NOK) stock pays a generous 6.9% dividend. In addition to its high dividend, the company has plenty of cash on its balance sheet.
After lagging the market throughout 2016, NOK stock currently trades at a reasonable 15.4 forward P/E ratio.
In terms of growth, Nokia recently completed an aggressive $17.4 billion buyout of Alcatel-Lucent. For the time being, synergy and post-merger cost cutting provide plenty of opportunities for NOK to overcome near-term headwinds and pad margins.
“We expect the combined company to face near-term challenges, but believe that it is well positioned for the development and rollout of 5G networks over the next several years,” Argus analyst Jim Kelleher said of NOK stock back in August.
Dividend investors tend to be patient, long-term investors by nature. Those types of investors shouldn’t have any problem waiting on the 5G upgrade cycle to play out for Nokia. NOK is in the small group of high-yield dividend stocks that also offer major potential long-term value. This stock is certainly not a bond-like investment.
High Dividend Stocks To Buy: Royal Dutch Shell (RDS.B)
Dividend Yield: 7%
Much like NOK stock, Royal Dutch Shell plc (ADR) (NYSE:RDS.B) chose to aggressively pursue a major acquisition during a lull in its business cycle. Aggressive may be an understatement when describing RDS.B’s massive $52 billion buyout of BG Group during the worst part of the oil market crash. Other oil majors were simply trying to navigate the downturn unscathed. RDS.B instead took the opportunity to position itself to thrive during the eventual recovery.
Things looked shaky for RDS.B and its 7% dividend there for a while when crude oil prices briefly dipped below $30 per barrel. However, now that oil prices seem to have stabilized in the $40-$50 range, RDS.B stock seems to have timed its acquisition perfectly. RDS.B management has said that the company’s long-term break-even point on the BG Group buyout will come when Brent crude prices hit the low $60s.
Shell hasn’t cut its dividend in more than 70 years, and its aggressive pre-collapse capex have several major projects set to come online in the next couple of years.
With a clear path to long-term growth, RDS.B will likely not be one of the high-dividend stocks that investors are dumping when interest rates start to rise.
As of this writing Wayne Duggan was long RDS.B stock.
