Even though the federal funds rate is only at 2.5%, rates have been gradually rising since 2014, and many on Wall Street think that it is possible that the rate hike we saw in December may be the last one in this cycle. In fact, Barry Bannister, the highly respected equity strategist at Stifel, feels the Federal Reserve must stop now and wait for the neutral rate to rise.

The neutral rate is the short-term interest rate that would prevail when the economy is at full employment and stable inflation: the rate at which monetary policy is neither contractionary nor expansionary. It is a function of the economy’s underlying characteristics and is not set by the Fed. It’s usually discussed in real terms with inflation subtracted out. The neutral rate cannot be observed directly; it can only be estimated.

In an outstanding new piece from Bannister and his associates, they feel like we are at a tipping point, and it makes sense for the Fed to at a very minimum pause. They also feel that bond proxy stocks and a defensive posture, a stance the firm took last fall, still make sense. The report noted this:

The Fed has taken restrictive policy to its very limits, and we see further S&P 500 downside if they do not stop tightening for most (or all) of 2019. There are signs the Fed may stand down and wait for the neutral rate to rise. Our 2019 S&P 500 target is 2,750 (+10%), which is a Trailing 12 months P/E of about 16.5x our below-consensus $166 (+7% y/y) EPS estimate (Street $172). We’ll stick with Staples, Healthcare, Utilities, Telecom as we await: (1) Fed clarity, (2) Street negative first half 2019 earnings-per-share revisions, and (3) relief from the ten year treasury to two year treasury yield curve inversion. Our view has been that this Fed tightening cycle began 4.5 years ago (in May 2014 during the QE3 taper, not at the first rate increase Dec-2015), and even at a fed funds only equal to “neutral” the Fed is well along and too tight, risking credit deterioration, recession and a deep (-35%/S&p 500) bear market.

The Stifel analysts continue to favor staples, health care, utilities and telecom for 2019. We screened the firm’s Select List of top stocks to Buy, for companies in those categories that paid the highest dividends. We found three that look like solid picks for investors.

Abbott Laboratories

This top pharmaceutical and med-tech stock has very solid growth potential. Abbott Laboratories (NYSE: ABT) manufactures and sells health care products worldwide.

The company’s Established Pharmaceutical Products segment offers branded generic pharmaceuticals to treat pancreatic exocrine insufficiency; irritable bowel syndrome or biliary spasm; intrahepatic cholestasis or depressive symptoms; gynecological disorders; hormone replacement therapy; dyslipidemia; hypertension; hypothyroidism; Ménière’s disease and vestibular vertigo; pain, fever and inflammation; migraines; anti-infective clarithromycin; cardiovascular and metabolic products; and influenza vaccines, as well as to regulate physiological rhythm of the colon.

Its Diagnostic Products segment provides immunoassay and clinical chemistry systems; assays used to screen or diagnosis cancer, cardiac, drugs of abuse, fertility, infectious diseases, and therapeutic drug monitoring; hematology systems and reagents; diagnostic systems and cartridges; instruments to automate the extraction, purification and preparation of DNA and RNA from patient samples, and detects and measures infectious agents; genomic-based tests; informatics and automation solutions; and a suite of informatics tools and professional services.

Abbott Labs investors receive a 1.81% dividend. The Stifel price target for the shares is $80, and the Wall Street consensus target is $79.58. The shares closed Wednesday at $69.50.

Kraft Heinz

Kraft Heinz Co. (NYSE: KHC) was formed almost three years ago via the merger of H.J. Heinz and Kraft Foods. The company is a leading global food company, with $29 billion of annual revenues generated by well-known brands such as Kraft, Heinz, Oscar Meyer and Maxwell House. The company is the third largest food and beverage manufacturer in North America and derives 76% of revenues from that market and 24% from International.

Its other brands include ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta.

Shareholders receive a 5.78% dividend. Stifel has a $72 price target, and the consensus target is $59.82. Shares closed at $43.34.

Philip Morris International

This company has continued to grow global market share and makes good sense for total return investors now. Philip Morris International Inc. (NYSE: PM) is one of the largest international cigarette producers, with a share of 28% of the international cigarette/heated tobacco market. Key combustible brands include Marlboro, Parliament and L&M.

The company is commercializing I-Qos portfolio, which is a heat not burn product, in over 40 markets. All of its sales are outside the United States. Stifel said this about the company:

We believe Philip Morris International offers superior underlying growth prospects, both near term and long term. The share price has been weak of late as investors have questioned the growth potential of its reduced risk products – we remain confident in the incremental growth contribution of these products.

Shareholders receive a 6.84% dividend. The $97 Stifel price target compares with the consensus target of $93.25. But shares closed at $67.31 on Wednesday.

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The Federal Reserve is walking a tightrope, and earnings will be lower this year along with overall growth. However, given the steep fourth-quarter sell-off, it makes sense to look for top companies that have been butchered and offer solid total return potential for 2019.

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