Investing

Interest Rates Are Going Higher: These 4 Top Dividend Stocks Will Do Just Fine

Lee Jackson

Published: October 4, 2016 8:20 am

Last Updated: January 13, 2020 2:50 am

The long slow easy ride for bond investors is just about over. While the Federal Reserve has been very slow to raise rates, a move many on Wall Street are not thrilled with, the snail-like pace is due to end. In fact, most top firms on Wall Street believe the Fed will raise rates by 25 basis points, or ¼ of 1%, in December and will raise two times in 2017 and 2018.

While some of the bond proxy stocks, like utilities, real estate investment trusts and telecoms, may struggle, not all the stocks in those categories are vulnerable. In addition, while the rate hikes will become regular, even by the end of 2018, the funds rates should still be below 2%.

We screened the Merrill Lynch research database for dividend-paying stocks with good forward earnings prospects that are rated Buy. We found four that should continue to grind higher.

CenturyLink

This is the largest of the rural local exchange carriers (RLECs) and is expected to continue get a large dose of government money to provide continuing internet service in rural areas. CenturyLink Inc. (NYSE: CTL) is a global communications, hosting, cloud and IT services company enabling millions of customers to transform their businesses through innovative technology solutions.

CenturyLink offers network and data systems management, Big Data analytics and IT consulting, and it operates more than 55 data centers in North America, Europe and Asia. The company provides broadband, voice, video, data and managed services over a robust 250,000-route-mile U.S. fiber network and a 300,000-route-mile international transport network.

Top Wall Street analysts have liked like the stock over the past year as the company transforms itself from a telecom to a technology company. While some have worried over CenturyLink maintaining the dividend, most are positive on the comparisons for the second half of the year and sequential revenue stability. They also cite an update on the data center sale progress and the potential for stock buybacks as additional positives.

CenturyLink investors receive a gigantic 7.87 % dividend. The Merrill Lynch price target for the stock is $42, while the Wall Street consensus price objective is $30.17. The stock closed trading on Monday at $27.52.

Enterprise Products Partners

This is one of the largest publicly traded master limited partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P.’s (NYSE: EPD) midstream energy services include gathering, processing, transportation and storage of natural gas, natural gas liquids (NGLs) fractionation, import and export terminaling, and offshore production platform services.

Top analysts remain positive on the rest of 2016 as volume headwinds for the company are lowered as new projects come online. They cite the commercial operations at the company’s ethane export facility and two gas processing plants in the Permian as the big contributors. Merrill Lynch points to the company’s above-average distribution coverage, strong liquidity and project backlogs as positives. Enterprise Products Partners also provides many of its services on the basis of long-term, fixed-fee contracts, insulating against some of the wilder swings of the commodities that it trades in.

Enterprise Products Partners investors are paid a very solid 5.8% distribution. The Merrill Lynch price target is $32. The consensus target is set at $32.48. The stock closed most recently at $27.41 per share.

General Motors

This company is in the automobile sector but looks to be very inexpensive at current levels. General Motors Co. (NYSE: GM) is the world’s largest automaker, with annual volume of almost 10 million units. The company reports its operations in four regions, North America, Europe, South America, and International, and it has made significant strides in restructuring its business following its 2009 Chapter 11 filing. GM now relies on only four core brands in its key North American segment: Chevrolet, GMC, Buick and Cadillac.

Long-term patient investors that can look beyond current issues may stand to make outstanding money on the auto giant, especially as low gasoline prices continue to push new buyers into showrooms. The stock was hit hard in the summer when Ford missed estimates and much of the blame was placed on incentives, which have been much lower at GM. While shares have rebounded, they are still cheap.

The company reported very solid second-quarter earnings recently, and with gas prices staying at the lowest levels in years, and GM producing some of the best new models in years, the future for the battered stock looks very good. The analysts also feel the company is well prepared for the next downturn.

GM investors are paid a 4.74% dividend. Merrill Lynch has a $43 price target. The consensus target is set at $36.72. Shares closed Monday at $32.04.

Occidental Petroleum

This is one of the higher yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.

With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002.

Shareholders are paid a 4.17% dividend. The $87 Merrill Lynch price target compares with a consensus target is set at $79. The stock closed on Monday at $72.46 per share.

Regardless of what rates do, these four companies should do fine as they have very strong and mature businesses, and a 1.25% increase in fed funds rate over the next two plus years won’t change that fact.