One of the biggest themes of financial markets in 2019 has been plunging rates. The 10-Year Treasury yield (alongside pretty much every other fixed income rate) has plunged in 2019, dropping from 2.7% on Christmas Eve 2018, to just over 2% in late July 2019.
The catalyst? Slowing economic expansion across the globe, which central banks want to curb. As such, central banks around the world project to cut rates in an insurance move to prolong the current economic expansion. Rates have plunged in anticipation of these cuts.
Will rates stay lower for longer? Probably. The Federal Reserve will likely cut rates a few times in the back half of 2019 to prolong the current economic expansion and breathe life back into the sluggish industrial economy, which has been hurt by rising geopolitical tensions. As such, the plunging rates theme of 2019 projects to turn into a consistent low rates theme in the second half of 2019.
There are two big implications for equities in a low rate world. First, equity valuations will move higher, since lower fixed income yields justify lower earnings yields, and therefore, a higher equity multiple. Second, investors will flock to stable dividend stocks, since many of those stocks are now yielding more than fixed income instruments.
Consequently, investors should do two things here. One, stay long the stock market. The environment remains favorable for stocks to go higher. Two, consider playing defense by buying some dividend stocks. So long as rates remain low, these stocks should have huge investor demand.
With that in mind, let’s take a look at seven big dividend stocks investors should consider in today’s rate world.
Big Dividend Stocks to Consider: CVS Health (CVS)
Dividend Yield: 3.6%
Projected Long-Term Earnings Growth Rate (from YCharts): ~5.5%
The Thesis: The bull thesis on CVS Health (NASDAQ:CVS) is pretty straightforward. This company breaks down into two parts: consumer pharmacy and PBM. On the consumer pharmacy side, fundamentals have been depressed by competition. But, the company is rapidly expanding the value prop of its already extensive retail footprint, integrating technology and data to create things like HealthHUBs and minute clinics, the sum of which should drive continued share expansion and healthier revenue growth trends.
On the PBM side, fundamentals have similarly been depressed by the growing threat of government regulation. But, the White House recently scrapped plans for a drug rebate plan that would’ve been disastrous for PBMs like CVS. As such, headwinds on the PBM side should ease going forward.
Broadly, the fundamentals on both the consumer pharmacy and PBM sides of CVS are set to improve, and as they do, depressed CVS stock (3.6% yield with a mid single-digit projected earnings growth rate) should take off.
Dividend Yield: 5.9%
Projected Long-Term Earnings Growth Rate (from YCharts): ~5%
The Thesis: As is the case with the bull thesis for CVS, the bull thesis on AT&T (NYSE:T) hinges on the idea this company’s darkest days are behind it, and that things will get better going forward.
The big headwind which has killed AT&T stock over the past several years has been cord cutting. AT&T makes a bunch of money from cable subscription and related fees. But, consumers have rapidly pivoted from linear to streaming TV, and in the process, have cancelled their cable subscriptions. AT&T’s growth trends have consequently suffered, as growth in wireless hasn’t been sufficient to offset wired losses.
But, both the wired and wireless businesses should improve from here. On the wired side, AT&T has enough content with the acquisition of Time Warner (think HBO, Cinemax, CNN, so on and so forth) to launch a compelling streaming TV service, which should attract enough subs to help offset the cord cutting headwind. Meanwhile, on the wireless side, 5G is coming, and it increasingly appears that the 5G tailwind will provide a big boost to the entire wireless industry, AT&T included.
Net net, AT&T’s depressed fundamentals should improve over the next few years. As they do, AT&T stock will bounce back.
American Electric Power (AEP)
Dividend Yield: 3%
Projected Long-Term Earnings Growth Rate (from YCharts): ~6%
The Thesis: The bull thesis on utility giant American Electric Power (NYSE:AEP) is very simple, and it centers around two things: yield and stability.
On the yield side, this is a stock with a 3% yield that 1) has consistently sported a yield above 3% for the past 30-plus years, and 2) has consistently hiked its dividend from ~40 cents at the beginning of the decade, to nearly 70 cents today. Meanwhile, on the stability side, American Electric Power is a company that 1) operates in the secular demand electricity services industry, and 2) has a track record of consistent and healthy revenue, profit and cash flow growth over the past decade.
Broadly, then, American Electric Power is all about yield and stability. Investors buy shares, get their yield, and don’t have to worry much about the stock. Over the past decade, AEP stock has risen nearly 200%. During that massive 200% rally, the stock never once fell into bear market territory (a 20% draw-down from recent highs).
As such, if you’re looking for yield and long-term stability, AEP stock is the cream of the crop.
Dividend Yield: 2.1%
Projected Long-Term Earnings Growth Rate (from YCharts): ~8%
The Thesis: When it comes to McDonald’s (NYSE:MCD), the bull thesis is secular in nature. Long story short, this is the world’s largest and favorite fast food chain, built on two value props that will never go away — unprecedented convenience and low prices.
McDonald’s has consistently innovated and iterated over the past several years to continue to dominate those two value props. They have reinvented their menu to offer more relevant, healthier options, at still low prices. They have heavily invested in technology and data to implement digital ordering kiosks, refreshed drive-thru infrastructure and much more, all of which has simply shortened wait times and enhanced customer convenience.
As such, McDonald’s has continued to dominate on price and convenience over the past several years. In so doing, the company has driven consistently positive comparable sales growth, which has in turn driven MCD stock higher.
All signs indicate this trend will continue for the foreseeable future. McDonald’s is doubling down on fresh beef options throughout its menu, and management is leaning more heavily into data to enhance business efficiency. For the foreseeable future, then, McDonald’s should continue to dominate on price and convenience. Continued dominance on those two fronts will support positive comps over the next several years, which will support MCD stock continuing to make new highs.
Dividend Yield: 2.9%
Projected Long-Term Earnings Growth Rate (from YCharts): ~6%
The Thesis: There are two pieces to the bull thesis on Target (NYSE:TGT) stock: a near-term bull thesis, and a long-term bull thesis.
In the near term, Target’s revenue trends are firing on all cylinders right now because the company has successfully built out an e-commerce business while expanding its omni-channel capabilities. These two things together have driven Target’s strongest streak of comparable sales growth in over a decade. But, building out e-commerce and omni-channel capabilities isn’t cheap. It requires huge investments. Those huge investments have weighed on margins over the past few quarters.
They are now starting to phase out (since Target’s omni-channel capabilities have already been mostly developed), and as these investments completely phase out over the new few quarters, Target’s robust top-line growth will be joined by equally robust margin expansion and profit growth. This reinvigorated profit growth will drive TGT stock higher.
In the long term, Target has shown an impressive ability to innovate and adapt to the dynamic retail landscape. This should give investors confidence that — no matter how consumption habits change over the next several years — Target should be able to leverage its huge reach and resources to adapt to those consumption changes. Consequently, in the long run, Target should grow alongside the U.S. consumer economy, meaning that revenues, profits and the stock should all trend higher over time.
Dividend Yield: 2.9%
Projected Long Term Earnings Growth Rate (from YCharts): ~7%
The Thesis: When it comes to Coca-Cola (NYSE:KO), you buy KO stock for three reasons.
One, this company is the king in the secular growth global beverage industry, which has stable and enduring demand drivers. No matter what, consumers around the world have to drink. And when they choose to buy a drink, chances are high they are going to buy a Coca-Cola product, considering that Coca-Cola owns about 40% of the global non-alcoholic beverage market.
Two, Coca-Cola has found a winning formula to stay atop the non-alcoholic beverage market. Coca-Cola uses data to identify up-and-coming beverage trends. They invest in the small beverage brands that have the most exposure to those trends. They then test those brands by putting them selectively into their global distribution channel. If one of those brands does really well, Coca-Cola acquires the whole brand, and launches that brand everywhere. In so doing, Coca-Cola has discovered a strategy wherein no matter how beverage market trends change, Coca-Cola will always be the company that sits atop the industry.
Three, KO stock is a symbol of stability with a big yield. KO stock isn’t volatile. At all. And, in the absence of volatility, the stock pays investors a nice near 3% yield. This combination of stability and yield makes KO stock a solid investment for any investor.
Dividend Yield: 3.3%
Projected Long-Term Earnings Growth Rate (from YCharts): ~18.5%
The Thesis: Global chip giant Qualcomm (NASDAQ:QCOM) is about to enter a golden era over the next several years. Thanks to a renewed multi-year licensing agreement with Apple (NASDAQ:AAPL), Qualcomm is once again the single most dominant player in the mobile phone chip market.
That’s a favorable position to hold in 2019. In the back half of 2019 and into 2020/21, 5G coverage is set to go mainstream. That’s a big deal. 5G isn’t just a step up from current coverage standards — it’s an entire new level of coverage that will enable an entire new set of possibilities in today’s smart device dominated world. As such, it will present a tremendous earnings growth opportunity for Qualcomm, which is why analysts project this company to grow earnings at nearly a 20% compounded annual pace over the next few years.
If Qualcomm can capitalize on the huge 5G opportunity in front — they should be able to, given their dominant position in the market — then QCOM stock will head higher over the next several years. A stock with a 3.3% yield and a ~20% projected EPS growth rate is simply too attractive for most investors to pass up on.
As of this writing, Luke Lango was long CVS, T, MCD, TGT and QCOM.