With the U.S. Federal Reserve skewing more dovish and the risks to economic growth still elevated, 2019 is shaping up to be a year where owning some quality dividend stocks could be the right move for just about any portfolio. We believe dividend stocks will rally strongly in 2019 now that the Fed has held its benchmark interest rate steady as of its January 30 meeting.
The central bank's path to slower interest rate hikes delivers a clear signal to investors that bond yields, which compete directly with dividend paying stocks, won’t be rising as quickly as was earlier expected.
Both futures and bond markets have already adjusted to this reality. Futures markets are now pricing in a strong probability that the Fed will leave rates unchanged in 2019. The five-year Treasury note now yields about 2.44%—down from more than 3% in November—which makes the higher yields on many dividend stocks attractive by comparison.
Any short-term capital risk inherent in buying high-quality dividend stocks is offset by the logic of betting on dividend payers that have a history of producing solid income for investors via a rising stock price driven by solid earnings and reliable dividend increases. Here are two examples we like:
1. Altria Group
Altria’s (NYSE:MO) 6.50% dividend yield is unquestionably attractive. The parent company of Philip Morris USA, with high-profile brands such as Marlboro, Skoal and Nat Sherman, cigarette maker Altria—whose shares closed at $48.84 on Friday—has seen its stock lose about 40% of value since the summer of 2017 as new government regulations and declining adult consumption of traditional tobacco products damaged the company’s growth potential.
We believe that steep decline should reverse soon. Our optimism that Altria’s shares have bottomed stems from the company’s recent aggressive moves to diversify its revenue base.
In December, Altria invested $12.8 billion in Juul, acquiring a 35% stake in the e-cigarette maker that has captured 75% of its alternative smoking segment in just three years. Prior to the Juul deal, in early December, Altria paid $1.8 billion for a 45% stake in Canadian cannabis company, Cronos Group (NASDAQ:CRON), one of the nation's largest marijuana producers, with a footprint in many countries and increasing production capabilities.
Along with its existing 10% stake in Anheuser-Busch InBev (NYSE:BUD), the largest beer producer in the world, and now sizeable positions in both Juul and Cronos, Altria is a good long-term bet, especially when its dividend yield is at a multiyear high. Over the past decade, Altria has consistently delivered high single-digit percentage hikes to its quarterly payout. The company now pays $3.20 a share annually, a sum that has grown every year during the past 49 years.
2. BCE Inc.
If sin stocks don't fit your investing criteria, Canada’s largest telecom operator, BCE (NYSE:BCE) may be a more attractive option with which to build a growing fixed-income stream.
Due to a limited number of competitors and strong demand from its expanding immigrant population, Canada’s telecom market has been a lucrative space for dividend stock investors.
BCE's dominant market position, huge investment in new technologies and a juicy 5.22% annual dividend yield make it an attractive stock for buy-and-hold investors. Shares, which closed at $43.23 on Friday, gained 10% this year after underperforming the broader market during 2018.
That momentum should continue, especially this year when the Bank of Canada is signalling a cautious approach to its interest rate policy after multiples hikes in 2018. Over the past decade, BCE has doubled its dividend payout, which is currently $2.27 a share per annum, proving the company’s ability to generate steady dividend income for its loyal investors.
Bottom Line
Dividend stock investing is an established way to earn regular income. In order to be effective, an investor basically looks for companies that can produce expanding cash flows, while also maintaining durable competitive advantages within their industries. Both Altria and BCE meet those criteria.