Investing
Rising Interest Rates and All, 13 Blue Chips Outyield 10-Year and 30-Year Treasuries
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After a series of stops and starts throughout the Federal Reserve’s interest rate hiking cycle, the eventual rise in long-term interest rates finally has started to play out in 2018. The 10-year Treasury has blown through that 3.0% yield that had acted as a ceiling for so long. More importantly, the 30-year Treasury’s long bond yield is now even approaching the 3.5% level. And this is all happening at the same time that the Dow Jones industrial average and the S&P 500 have yet again hit all-time highs.
While many equity investors have a fear of rising interest rates and a never-ending worry that equity prices are vulnerable to a correction, there are always some bright spots to consider. First is that the recent rise in interest rates is because the economy is surging under higher gross domestic product (GDP) growth and lower unemployment. Another issue to consider, particularly now with a trade pact done with Mexico and Canada, is that a trade war in China will actually hurt China more than it hurts the United States. And there is also the notion that inflation is now running at roughly the higher-end of the Fed’s target rate.
24/7 Wall St. looks for pockets of companies where investors can hide out in during periods of uncertainty, rising interest rates or when economic growth might not be at its full potential. Specifically, we are identifying companies with dividends that are currently higher than the 10-year Treasury note (almost 3.20%) and the 30-year Treasury bond (3.35%).
What was interesting about the most recent move in higher interest rates is that long-term yields have risen roughly the same number of basis points (25 or so) as short-term rates since mid-September. The Federal Reserve moved to hike its federal funds rate by 25 basis points at the end of September.
When considering pockets of stocks versus bonds, investors need to understand that the yields on the Treasury debt are effectively considered to be risk-free and that they are also locked in yields until maturity. And just like bond yields, the yield and price are inverted in nature for stocks too in a steady dividend model — as share prices rise, the yield comes down, and as share prices fall, the yield increases.
When comparing these long-term bond yields to stocks and their dividends, investors have to weigh where the economy is likely to head over the coming 10, 20 or even 30 years. If there are well-established companies with decades of operating histories and a history of raising their dividends, then what is the long-term value of a stock’s potential appreciation (capital gains) and what is likely to happen to its dividend over time? Stocks are never considered risk-free investments like the Treasury securities, if held to maturity, so the risk has to be considered versus the guarantee.
Most investors believe that equity prices in general gradually will rise over longer time horizons. There is an entire 100 years or more of modern economic history backing up this theory. And that includes the recent Great Recession, the Great Depression and even World War II. Most investors also believe dividends will rise over time as companies continue to earn more money. Again, there are no guarantees, and there can be quite violent interruptions that interfere with many of the long-term growth forecasts. That said, when investors can still get safe dividend yields that are higher than the longest maturing Treasury yields, then it means that there are still opportunities in stocks over the long term.
In our screening of stocks with higher dividend yields than both the 10-year and 30-year Treasury, we set a floor of a $20 billion market capitalization rate. Most companies are above $50 billion, and many are higher than $100 billion in market caps. We also have a stable dividend screen and these companies had to be easily recognized names, so there are no unknown companies. Also eliminated from the mix was the vast number of real estate investment trusts and utilities, which could have been counted because those sectors tend to attract investors the most when interest rates are lower.
All these companies currently have a dividend yield of at least 3.4%. Some of these yields are considerably higher. We have included the share price and dividend yield, market caps, a trading range and the Thomson Reuters consensus analyst price target. Additional color and commentary also have been included around each company for additional references.
The following are 13 companies with solid dividends that currently yield more than both the 10-year Treasury note and the 30-year Treasury bond.
AbbVie Inc. (NYSE: ABBV) currently has a 4.0% dividend yield. Much of the high yield is due to its shares having been punished over expected legal cases and drug competition for Humira now and in the years ahead. Still, AbbVie has a long history of growing earnings and increasing its dividend over time.
AbbVie shares were last seen trading at $95.65, with a market cap of $144.8 billion. The pharmaceutical giant has a 52-week trading range of $85.24 to $125.86 and a consensus price target of $109.89.
Altria Group Inc. (NYSE: MO) is the top domestic player in cigarettes and tobacco, and it is now free of its old international operations after a break-up with Philip Morris International. Altria has a 5.25% dividend yield and, despite declining smoker trends, it has kept prices up enough to get higher earnings per share and higher dividends.
Altria recently traded at $60.80, and it has a market cap of $114.6 billion. The tobacco giant has a 52-week range of $53.91 to $74.38 and a consensus price target of $67.52.
AT&T Inc. (NYSE: T) has been changing its former telecom and wireless model to a conglomerated model that also includes satellite TV via DirecTV and content and media via Time Warner. Its yield may be artificially high because of its poor stock performance, but some analysts are thinking that AT&T can return to better earnings per share growth in the coming years. AT&T’s current dividend yield is a stunning 5.9%, and it has been a steady dividend grower over time.
AT&T shares recently traded at $33.70, with a market cap of $245.0 billion. The telecom giant has a 52-week range of $30.13 to $39.80 and a consensus price target of $35.36.
Chevron Corp. (NYSE: CVX) is the second largest oil and gas giant in America, and it turns out that fossil fuel still likely has a role in the world’s energy consumption for decades into the future. It commands nearly a 3.6% dividend yield.
Chevron shares were last seen at $124.94, with a market cap of $239.4 billion. The oil giant has a 52-week range of $108.02 to $133.88 and a consensus price target of $146.15.
Exxon Mobil Corp. (NYSE: XOM) is of course the largest oil and gas giant in America, and it has grown in natural gas by acquiring XTO and has become more active in some regional shale plays like the Permian. Its dividend yield is 3.8%.
Exxon shares were trading at $85.94, with a consensus price target of $89.64 and a 52-week range of $72.16 to $89.30. The oil giant has a market cap of $363.8 billion.
Coca-Cola Co. (NYSE: KO) has been a boring company for investors for the better part of a decade. That said, Warren Buffett is still the largest shareholder by far, and Coca-Cola has decades of dividend hikes under its belt. Its current dividend is just above the 3.4% line.
Coca-Cola shares were last seen at $45.50, and it has a market cap of $193.8 billion. The beverage giant has a consensus price target of $50.98 and a 52-week range of $41.45 to $48.62.
Ford Motor Co. (NYSE: F) is one of the auto giants that most investors would assume has a higher market value than it does. That is because its share price has slid lower over the past few years. With a move away from most coupe and sedan models, Ford is transforming into a truck and SUV maker focused on higher profit vehicle sales. Ford was also able to avoid the recession-era bankruptcies. Due to its sell-off, it now has a whopping 6.5% dividend yield.
Ford shares were trading at $9.20, with a consensus price target of $10.67. The auto giant has a market cap of $36.6 billion and a 52-week trading range of $9.09 to $13.48.
General Motors Co. (NYSE: GM) is the new reconstituted GM after the government bailouts. The company is expanding efforts in electric and autonomous vehicles for the future, and it still has challenges internationally. Despite a stock that has been stuck between $30 and $40 over most periods in recent years, GM’s dividend yield is about 4.4%.
GM recently traded at $34.60 a share, with a market cap of $48.8 billion. The auto giant has a consensus price target of $45.37 and a 52-week range of $33.20 to $46.76.
International Business Machines Corp. (NYSE: IBM) has been stuck as a no-growth story for years. That finally may be changing as its strategic imperatives begin to unfold from the cloud, artificial intelligence, business intelligence and even blockchain. Big Blue has a history of raising its dividend, and the technology giant has a 4.1% dividend yield.
Shares of IBM were trading at $152.00, with a market cap of $138.9 billion. The computer giant has a consensus price target of $163.47 and a 52-week range of $137.45 to $171.13.
PepsiCo Inc. (NASDAQ: PEP) may have a brand new CEO, but the snack food and beverage giant has kept its earnings per share up despite revenue headwinds. PepsiCo has a 3.5% dividend yield.
Its shares were trading at $106.00, and it has a market cap of $150.2 billion. The food and beverage giant has a consensus price target of $118.18 and a 52-week range of $95.94 to $122.51.
Procter & Gamble Co. (NYSE: PG) has made slight changes here and there with its endless portfolio of consumer product lines and brands. Its shares have even managed to dust off at least some of the negativity with a solid recovery. It has raised its dividend for more consecutive years than many of us have been alive. The current dividend yield is 3.5%.
The shares were trading at $81.30, with a consensus price target of $83.63 and a 52-week range of $70.73 to $93.51. The brand giant has a market cap of $202.4 billion.
Qualcomm Inc. (NASDAQ: QCOM) has fought some revenue headwinds, even while other chip companies flourished in recent periods. It was blocked by China in its efforts to acquire NXP in a game-changing merger that would have greatly diversified its business, and it has been in a continued fight with Apple over its processor use in phones and tablets. Its dividend yield is just above 3.4% now, and that dividend has doubled over the past five years.
Shares of Qualcomm were trading at $72.50, with a market cap of $106.3 billion. The semiconductor giant has a consensus price target of $72.62 and a 52-week range of $48.56 to $76.50.
Verizon Communications Inc. (NYSE: VZ) may have a business model that is much more dedicated to telecom and wireless than rival AT&T, after its recent acquisitions diversified its revenues, but Verizon has been a steady dividend grower. It also recently decided to induce cost-cutting measures in the billions of dollars by offering early retirement packages to cut its 150,000-plus workforce. Verizon’s shares have performed better over the past year, with a rising price lowering its dividend yield, but the telecom giant currently has just above a 4.4% dividend yield.
Verizon shares were trading at $54.40, and it has a market cap of $223.9 billion. The telecom has a consensus price target of $56.58 and a 52-week range of $43.97 to $55.42.
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