Blue chips weren’t the best dividend stocks to buy in 2014 — far too many lagged the broader market — but with a rate hike and higher volatility on tap for 2015, some blue-chip dividend stocks look like good bets for the new year.
True, stocks as an asset class enjoyed a more-than-respectable 2014, as the U.S. equity benchmark S&P 500 gained about 12%. Blue chips, however, weren’t really the best stocks to buy — not when that blue-chip bastion known as the Dow Jones Industrial Average rose less than 9%.
The new year should offer better results for at least some blue-chip dividend stocks, however, thanks to a number of factors. An aging bull market favors large-cap stocks — the bigger the better — and that should help the mega-caps in the Dow.
A return of volatility will also benefit large caps, and if they’re dividend stocks, so much the better. When market turbulence hits, investors like big, stable dividend stocks to buy.
Finally, a rate hike might hit dividend stocks in the short term as traders stir things up, but there’s no evidence that dividend stocks fare worse than any other rate-sensitive asset class in a rising-rate environment.
True, dividend stocks have to compete with bonds, and newly issued debt will offer improved yields after a hike, but interest rates still will be close to historic lows. The Federal Reserve is looking at a rate hike of 0.25% — not 2.5%.
Thanks to these factors and some more company-specific news, here are three promising blue-chip dividend stocks to buy for 2015:
Blue-Chip Dividend Stocks to Buy: AT&T Inc. (T)
T Dividend Yield: 5.6%
AT&T Inc. (T) offers the highest yield among dividend stocks in the Dow Industrials and one of the highest in the S&P 500. Too bad those payouts were the only thing propping up T stock in 2014. T stock is set to end the year with a 3% loss on a price basis, but thanks to the dividend, the telecom generated a total return of more than 2%.
The generous dividend and ample free cash flow will make T one of the more popular dividend stocks to buy when volatility returns in 2015. Indeed, now that other traditional safe-haven sectors like utilities have gotten too pricey, T should get more than its share of inflows when defensive names gain favor.
It’s also significant that AT&T stock has been weighed down this year by some heavy dealmaking and the attendant regulatory risk. Closing the acquisition of DirecTV (DTV) should lift a headwind for T stock. Meanwhile, DTV’s contribution to revenue will take the sting out of T’s wireless price wars.
Blue-Chip Dividend Stocks to Buy: JPMorgan Chase & Co. (JPM)
JPM Dividend Yield: 2.6%
A return of volatility and higher interest rates are just what blue-chip dividend stocks like banks need to boost their top and bottom lines. No, JPMorgan Chase & Co. (JPM) didn’t have a bad year. The stock generated a total return of nearly 11%. But it did underperform the broader market.
Next year promises a return to market-beating returns for the nation’s biggest bank by assets. The fines and legal migraines left over from the financial crisis are finally behind the banking industry. The housing market appears poised to shift into a higher gear again, too.
Best of all, volatility will let JPM’s investment banking business go back to printing money. (Trading desks need volatility to rake in profits.) At the same time, a rate hike will cause a surge in volume on its highly lucrative fixed-income trading desk. The outlook for mergers and acquisitions is bright, and rising rates will lift net interest margins in the boring old business of traditional banking.
Blue-Chip Dividend Stocks to Buy: Exxon Mobil Corporation (XOM)
XOM Dividend Yield: 2.9%
Oil prices are down about 50% since June and that’s been very bad news for any stock related to the oil and gas industry. Dow component Exxon Mobil Corporation (XOM) has been no exception, losing 5.5% on a total return basis in 2014 — but this selloff might just be overdone.
After all, this is an energy major with massively diversified operations, and $50-a-barrel oil really can’t last all that long. Heck, anything below $70 a barrel puts the average shale-oil driller into the red. Yes, Japan and Europe are flirting with recession, but an accelerating U.S. economy should boost energy demand. Maybe the U.S can even help drag other developed nations back to okay economic growth.
Perhaps most importantly, the energy sector has been pounded so hard that it’s become a major theme for value investors in 2015. Stocks have fallen so far so fast, there have got to be bargain buys in the oil-and-gas sector, the thinking goes, and XOM certainly fits the description.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
