Will the Fed force yield lovers into these stocks?
The extension of Operation Twist makes stocks that pay a healthy dividend more attractive than ever.
By Eric McWhinnie, Wall St. Cheat Sheet
The Federal Reserve recently announced it would extend Operation Twist, a program where the central bank sells short-term securities and buys long-term securities. The Fed also reiterated its stance to keep interest rates exceptionally low through at least late 2014.
While the moves are aimed at boosting the economy, they are another blow to those seeking yield.
The zero-interest-rate policy environment is making it harder for investors and savers to earn a decent return on their money. As a result, many are seeking companies that pay a healthy dividend. Last year, two-thirds of the companies in the S&P 500 raised their dividends. Year-to-date, almost 40% of the S&P 500 members have increased their dividends. Organizations across various industries are attempting to return value to shareholders as slowdown fears continue to cause volatile swings in the market.
Joeseph Keating, executive vice president and chief investment officer for CenterState bank, believes the trend of hiking dividends will continue. In an interview with CNBC, he explained, "If you think about the yield and the rate environment we are in today, paying a healthy dividend is a tremendous investor courting technique by your big brand name companies that have good cash flows and can afford to pay a dividend and hopefully grow that dividend over time."
He cites Republic Services (RSG), Norfolk Southern Corp. (NSC) and Lockheed Martin (LMT) as companies that should be raising their dividends in the fourth-quarter. Keating also recommends McDonald's (MCD), which currently pays a dividend north of 3% and has raised its dividend for the past 35 years. "It's a Europe play also. McDonald's has lost $10 or $12 recently off its share price because of the concerns on its exposure to Europe. Its a great entry point into McDonald's," Keating said.
The technology sector also provides strong dividend opportunities for investors. Microsoft (MSFT) currently yields 2.7% and has increased its dividend for the past six consecutive years. (Microsoft owns and publishes Top Stocks, an MSN Money site.) Last September, the Dow component hiked its dividend payment by 25%, representing its biggest jump in eight years. Earlier this year, Apple Inc. (AAPL) announced it would begin paying shareholders a quarterly dividend of $2.65 per share in its fiscal fourth-quarter. It is the company's first dividend in more than 15 years.
However, investors should be cautious on tech names that face large headwinds from competition. For example, Dell (DELL) recently initiated its first dividend in company history, but its business has been struggling. Shares are down 17% year-to-date and the company recently announced plans to cut $2 billion over the next three years through supply-chain streamlining and reducing sales support staff.
Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.
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Stocks drift lower and bonds are hit as investors await the Fed. Prepare for higher volatility this week.
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