Interest-rate-sensitive stocks have been through some trying times in the last six months as investors have weighed whether the Federal Open Market Committee would raise rates or hold pat. The increased volatility in the market over the last four months has resulted in a rebirth of interest in dividend stocks as investors are now trying to straddle a bevy of scenarios from the markets.
Click to Enlarge Yesterday, we headed into another FOMC meeting under the assumption that the Fed would hold off on increasing rates. Turns out, the Federal Reserve met our expectations, but how long will that trend continue?
One strategy can outlast the FOMC’s open-ended interest rate policy: investing in dividend stocks with growth potential.
Our Behavioral Valuation model identifies dividend growth stock opportunities by looking for the underappreciated (or uncrowded trades) opportunities within dividend-yielding stocks. This approach provides yields in excess of 3% — an attractive interest rate substitute in the case that rates don’t move higher. At the same time, the growth potential for these stocks should help them thrive in case the FOMC does slowly raise rates.
The best of both worlds for now …
The table above identifies the nine stocks uncovered by our proprietary models’ dividend growth program. Why nine? Because 10 didn’t qualify this week.
Using this list, we’ve come up with the following four out-of-the-box dividend stocks with growth potential.
Out-of-the-Box Dividend Stocks: Caterpillar Inc. (CAT)
Dividend Yield: 4.1%
Growth Potential: 24%
Heavy equipment manufacturer Caterpillar Inc. (CAT) has been struggling over the last few years as analysts and economic data have flashed signs of slowing growth. Recent fundamental data is showing signs of some “green shoots” lately as the company has bested analyst expectations and issued guidance that was slightly higher than Wall Street’s.
Technically, Caterpillar stock has found some long-term support at the $60 level which may help to begin an intermediate-term rally towards our target of $90.
Analyst recommendations and current short interest tells us that investor sentiment is relatively bearish. This means that any rally may turn bears into buyers of CAT stock, helping to drive prices toward our target.
Caterpillar will participate in the Bank of America Global Industrial Conference later this week, where we may hear more on their guidance for the upcoming quarter. Any positive news will help trigger a sentiment-driven contrarian trade.
Out-of-the-Box Dividend Stocks: Darden Restaurants, Inc. (DRI)
Dividend Yield: 3%
Growth Potential: 20%
What can we say about Darden Restaurants, Inc. (DRI)? This stock has been on our radar and buy list for more than a year as strong fundamentals have mixed with pessimistic sentiment to make for a perfect bullish contrarian trade.
With a short interest ratio of 8.7, the stock is back on our list of Short Squeeze Stocks for March with a short-term target of $80 as the short sellers that have been betting against the stock start folding their positions by buying the shares back.
Over the long-term, the positive fundamental backdrop and 3% dividend yield makes DRI stock a nice low-volatility hold for almost any diverse portfolio through 2016.
Out-of-the-Box Dividend Stocks: Tanger Factory Outlet Centers (SKT)
Dividend Yield: 3.2%
Growth Potential: 14%
OK, so I would love to tell you that my everyday research includes watching my wife rack up thousands of dollars of sales at the Tanger Factory Outlet Centers (SKT) malls, but I’ve been blessed with a reasonable shopper. Nonetheless, Tanger’s malls have seen better-than-expected earnings and revenue results almost every quarter over the last two years as shoppers continue to search for deals when shopping.
Short interest and analyst recommendations suggest that the crowd is betting against this relatively strong leader, which almost always results in higher prices as the crowd eventually capitulates and turns into buyers.
The strong technical and sentiment backdrop suggest a price target of $40 over the next three to six months — a 14% gain from Tuesday’s close.
Out-of-the-Box Dividend Stocks: Bank of Montreal (USA) (BMO)
Dividend Yield: 4%
Growth Potential: 19%
In the case of Bank of Montreal (USA) (BMO) stock, rising oil prices are helping the cause as many investors associated default risks with risks for these Canadian bank stocks.
Bank of Montreal stock is coming off of some long-term oversold readings after hitting long-term round-numbered support at the $50 level. The technical charts suggest $70 as a potential price target.
Supporting the bullish case are the signs of extreme pessimism from the stock’s sentiment indicators. Analyst buy recommendations of 14% and a short interest ratio greater than 18 suggests that everyone has been selling this stock, which is usually the best time to be a buyer.
Our model is suggesting a price of $70 over the next six months, which comes to a gain of over 15% from current levels.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.