Following the surprising election of Donald Trump as the next U.S. president — and the market’s stunning rally in response — it’s looking increasingly likely that the Federal Reserve will begin raising interest rates again starting in December.
And rising rates typically are no friend of dividend stocks.
A post-election Reuters poll found that 85% of economists believe a December rate hike is coming. Yes, any interest rate isn’t going to be in percentage points, but basis points … but nonetheless, any move higher in interest rates is going to put at least a little pressure on dividend stocks as investors move into safer avenues for yield.
This is doubly problematic because the stock market is near (or at, depending on the index) all-time highs. Many dividend stocks have been on quite a run in the past year, investors also will be considering high valuations when deciding whether to bail from these stocks to the safety of bonds.
But not every dividend stock is expensive right now, and not every stock will feel the pinch if Janet Yellen announces higher interest rates in December.
Right now, we’ll look at three dividend stocks that look Fed-proof for a number of reasons, whether it’s relatively cheap valuations or simply playing in an arena where a rate hike won’t spell doom. In no particular order …
Dividend Stocks to Buy No Matter What the Fed Does: General Motors (GM)
The S&P 500 is up more than 130% since the start of 2009, so yes, there aare plenty of expensive stocks in the market.
General Motors Company (NYSE:GM) isn’t one of them.
The U.S. auto industry logged record sales of 17.47 million vehicles in 2015, and is pacing to beat that number this year. Yes, GM is a little off year-over-year based on year-to-date sales, but the company is coming off a stellar October that saw the company take its largest market share for the month since 2009.
Also, GM is still performing well operationally, reporting EPS growth of 15% to 47% over the past four quarters, and revenues are up by double digits over the past two quarters.
You wouldn’t know it by looking at GM stock, which is off about 1% over the past year.
Even if the auto industry has reached a cyclical plateau, industry experts expect several more years of near record-level sales. Meanwhile, GM trades at less than 6 times forward estimates for earnings, and it pays out a whopping 4.4% in dividends.
GM stock is an extreme value play, and its dividend is large enough that a nominal rate hike shouldn’t scare many investors out of shares. Plus, GM has the blessing of Warren Buffett, which is a nice bit of reassurance.
Dividend Stocks to Buy No Matter What the Fed Does: International Business Machines (IBM)
Much like GM, International Business Machines Corp. (NYSE:IBM) is underappreciated right now.
IBM is a Buffett holding, too — in fact, IBM stock is one of Buffett’s four largest holdings, and the Oracle even added to his position earlier this year.
At Berkshire Hathaway Inc.’s (NYSE:BRK.B) annual shareholder meeting in May, Buffett said he is much more likely to buy more IBM in the next couple of years than he is to sell. Clearly, the most legendary value investor of all time is not worried about the impact of rising interest rates.
ThomasPartners CIO Bill McMahon isn’t worried either. Back in September, McMahon named IBM stock among the five dividend value stocks selective investors should consider. McMahon said rising rates will have the largest impact on bond-like stocks. However, there are plenty of dividend value opportunities in the financial and technology sectors.
IBM’s 3.4% dividend isn’t exceptional, but it’s high among the tech crowd. And it’s certainly not expensive, trading for around 11 times forward earnings expectations.
Dividend Stocks to Buy No Matter What the Fed Does: JPMorgan Chase (JPM)
Grasek and other experts agree that a Republican sweep in Washington has created a perfect storm for bank stocks.
First, rising interest rates will ease pressure on banks’ net interest margins. Morgan Stanley also believes Republicans should have no problem passing a bill to lower corporate tax rates to 20%, which would create a major earnings tailwind for banks. In addition, Trump’s stance on loosening regulations could also help eliminate one of the primary headwinds for bank growth.
JPM only yields 2.4%, which you’d think would put it in danger of selling off should investors ditch stocks and pile into suddenly higher-yielding bonds. However, a rate hike would benefit JPMorgan’s business, and the Republican mandate will likely embolden banks like JPM to be even more aggressive with their 2017 capital return programs.
So there’s not just significant upside potential in JPM — there’s a chance at a major bump in the dividend in the first half of 2017.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.