In his annual letter to shareholders, JPMorgan (NYSE:JPM) CEO Jamie Dimon warned that interest rates could rise to “8% or even more.” As the head of the largest bank in America, Dimon is very attuned to the impact of rising interest rates on consumers, companies and the global economy. For investors, Dividend Aristocrat stocks should become more appealing as long-term buys should interest rates rise.
When interest rates rise, dividend-paying stocks tend to suffer as investors prefer less risky fixed-income instruments such as bonds that now have higher yields. To be a Dividend Aristocrat, a member of the S&P 500 must have increased their dividends annually for 25 years or more. As a great deal of the profit in the stock market emanates from dividends (as much as 85% of the total cumulative return according to research from Hartford Funds), the income component of a stock is a significant part of the overall return.
In that way, Dividend Aristocrats are superior to bonds as the income from the holding rises annually. Few bonds increase the income paid to owners, but Dividend Aristocrat stocks have a practice of doing it annually.
Coca-Cola (KO)
Coca-Cola (NYSE:KO) is legendary investor Warren Buffett’s longest-term holding at 34 years. While Coca-Cola has many competitors, its brand is the ultimate flex. Coca Cola is rated as the most valuable food and beverage brand in the world. The strength of the brand is evidenced in the numbers.
Return on equity is 42%. That is a Buffett favorite indicator and he looks for one of at least 14%. The profit margin is attractive too at nearly 24%. Income investors love the 3.33% annual dividend yield and the history of steadily increasing the amount. The dividend yield of Coca-Cola is more than twice that the 1.35% average for the S&P 500.
Coca-Cola has a low beta of 0.59x, making it ideal to write covered call or covered put options as it is less volatile than the market as a whole (and most options expire worthless).
With the strong income history, low beta and robust volume, Coca-Cola is also ideal for capture-the-dividend plays.
Exxon Mobil (XOM)
Like so many other energy firms, Exxon Mobil (NYSE:XOM) is soaring due to the runup in oil as a result of conflict in the Middle East. In fact, crude oil prices are up more than 20% so far in 2024.
No matter the price of oil, the balance sheet of Exxon Mobil should attract investors. Its price-to-earnings ratio of 13.7x is far below the typical S&P 500 range of 20.54x to 28.78x.
At 3.16%, the dividend yield is also a sign of strength at more than twice the S&P 500 average. This high dividend and low beta (0.96x) of Exxon Mobil allows for generating more income from writing options and capturing the dividend when it is paid.
Verizon (VZ)
Verizon (NYSE:VZ) is one of my favorite Peter Lynch stocks. Lynch, the legendary mutual fund manager from Fidelity Investments, said invest in what you know.
If you see everyone drinking Coca-Cola and lined up for gas at Exxon Mobil, buy the stock. Verizon has treated me very well as a wireless customer for 24 years. The shareholders are mainly institutions with The Vanguard Group being the largest. And all who own the stock receive a staggering 6.7% dividend yield, about 5 times the average S&P 500 member payout!
The beta for Verizon Communications is 0.4x with strong volume, so it is appealing for both writing options and capture-the-dividend plays.
On the date of publication, Jonathan Yates did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
