It’s coming. The Federal Reserve will raise rates any day now.
Are you prepared?
Given the uncertainty in the market and an expectation of flat returns, there’s one place investors should be as the Federal Reserve raises rates.
Let’s take a look…
Volatility has spiked in advance of the Federal Reserve’s expected lifting of interest rates. When such volatility materializes, it usually signals uncertainty. Most of the professional investor class has yet to witness a market of rising interest rates.
Text books will tell them how to proceed, but is that something to trust?
Not really, when you consider that we’re truly entering uncharted territory. Nobody knows what will transpire after the Federal Reserve raises rates. About the best we can surmise is more of the same, especially in the equity markets.
That means a sideways trade in a very narrow range, with minimal gains—if any—coming over the next year.
In reality, there are some certainties regarding the central bank’s actions.
At the top of the list is a flattening of the yield curve. Bond investors are in a real conundrum under such a scenario. Do they sell short-term bonds and buy long term as the curve flattens?
Perhaps, but a better way to go might be to migrate to dividend stocks.
Here are two good ones to help you weather the storm…
First, consider Kellogg Company (K).
With a dividend just under 3%, an investor in Kellogg can take flat returns for the year and still make a reasonable return. Rising rates mean bond prices fall.
That will be unlikely with dividend stocks.
The sideways move in stocks provides an element of safety in dividend stocks that can’t be found elsewhere.
Kellogg will simply keep selling cereal, no matter how many times the Fed lifts interest rates.
The second dividend stock to consider is Snap-on (SNA).
The tool-making company pays a 1.5% dividend.
Total returns for both Kellogg and Snap-on should be in the 5-7% range for the year.
Not bad, considering the alternatives.
The only risk in placing a dividend trade is valuations.
From a fundamental standpoint, both Kellogg and Snap-on are expensive.
The premiums are justified as uncertainty increases, and downside risk for both equities and bonds increases as the Fed begins raising interest rates.
The safety of dividend stocks plus a reasonable return for the effort will continue to attract capital in 2016.
Many expect the Fed will raise rates three or four times in 2016. That should keep the bids for dividend stocks on the high side despite high valuations.
More buying simply means a higher price.
For a dividend buyer in advance of the first Federal Reserve move, the combination of yield and share price increases is a powerful way to gain certainty at an uncertain time.
Make sure you’re ahead of the game.
This post originally appeared in mainstreetinvestor.com.