Reliable Dividend Stocks You Can Count On to Combat Plunging Bond Prices
The markets are taking a predictable breather ahead of the Federal Reserve’s meeting later this week. Analysts from every corner of the globe are weighing in on whether or not the Federal Reserve is going to begin tapering its stock market-fueling $85.0-billion-per-month bond-buying program.
Stock markets have been on a tear ever since the Federal Reserve initiated its first round of quantitative easing in late 2008. Since early 2009, the S&P 500 has climbed more than 150% and is up roughly 17.5% year-to-date.
But the Federal Reserve can’t print money and keep interest rates artificially low forever. Once the Federal Reserve sees enough data pointing to a sustained economic recovery (unemployment, housing prices, inflation, etc.), it’ll begin to taper off.
Based on so-called encouraging economic jobs data, many think the U.S. economy is strengthening. For investors, this is bad news, because it means the Federal Reserve will start tapering sooner rather than later, and a decrease in the demand for bonds will, of course, lift bond yields. This could throw income investors a serious curve-ball.
Over the last five years, quantitative easing has kept the 10-year Treasury yield near its record lows, hovering around two percent for the last two years. The record-low numbers sent income investors scurrying into dividend stocks in an effort to make up for lost ground. Over the last number of years, income investors were able to realize both significant capital gains and dividend growth.
But that could change, as investors who have been seeking financial solace in dividend stocks with yields of four percent or more are now seeing 10-year Treasury yields above three percent—the first time since July 2011. So the question is: are dividend stocks, which according to some analysts are overpriced, worth the risk? And if bond prices continue to fall, will high-dividend-yielding stocks be able to make up for any potential losses in capital?
The biggest question for those pondering dividend stocks is: are they overpriced? Over the past year, dividend-paying stocks on the S&P 500 were trading for 14.7 times their adjusted operating earnings.
Yet over the last 10 years, the average price-to-earnings ratio for dividend-yielding stocks on the S&P 500 was 14.9. This suggests that S&P 500 dividend stocks may not be as overvalued as some analysts think; in fact, they could have plenty of room to run, especially if their earnings continue to grow.
Regardless of what the Federal Reserve decides to do this week, there remain a large number of reasonably priced stocks with attractive yields worth considering.
Frontier Communications Corporation (NASDAQ/FTR) provides phone, Internet, and satellite TV (through a partnership with DISH Network) services to more than 25 states. The company provides an annual dividend of 9.3% and reaffirmed its full-year guidance.
Gannett Co., Inc. (NYSE/GCI) is the top newspaper publisher in the U.S.; its flagship paper is USA TODAY. The company also owns 23 television stations and more than 200 papers in the U.K. Gannett Co. provides an annual dividend of 3.3%. During the second quarter, it reported solid broadcasting and digital revenue growth and its fourth consecutive quarter of year-over-year circulation revenue growth.
Investors looking for dividend stocks that outpace bond yields need to look beyond the short term. Instead of just looking at dividend yields, look for reasonably priced stocks with great upside potential and strong liquidity, ensuring both long-term capital gains and dividend growth.
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