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Taper Tantrum Dividend Plays

By Contrarian Outlook (Brett Owens)Stock MarketsOct 13, 2021 05:15AM ET
Taper Tantrum Dividend Plays
By Contrarian Outlook (Brett Owens)   |  Oct 13, 2021 05:15AM ET
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If I were a Federal Reserve official—and I were not currently under investigation for sketchy February 2020 trades—I’d really be tempted to “back up the truck” on key taper tantrum dividend stocks.

These obvious payout plays have already soared 56% or more year-to-date. But there’s more to come because their profits are being artificially suppressed by the Fed. (Yes, you read that right. The Fed money flood is boosting everything except for these laggards. For now.) Once this constraint is lifted—or even moderated a bit—their bottom lines are going to boom.

Today, the Fed is buying $80 billion in government bonds every month. Yes, Chairman Jay Powell wants to kick this addiction, but thus far he can only bring himself to “think about it.”

Eventually, he will try to cut back on this bad habit. This opens the door for us laypeople to profit.

Treasury yields are based on supply and demand. Supply (bond issuance) is huge, but so is demand, with the Fed stepping in for $80 billion per month. When this big buyer cuts back, we’re likely to see the yield on the 10-year note rise to attract other buyers.

This is already happening. When we chatted at the beginning of 2021, the 10-year note paid just 1%. It has since soared to 1.6%, which may not sound like much but is a 60% increase.

As the 10-year yield has risen, so have bank profits. Small banks were my favorite dividend ideas for 2021 for this reason. They directly benefit from higher rates because their lending profits pop.

Synovus Financial (NYSE:SNV) has gained 30% since our January conversation. Not bad for a safe dividend stock! Comerica (NYSE:CMA) has done even better, returning 56% (including dividends) since our Contrarian Income Report service’s official recommendation earlier this year.

Value-minded investors (shout out to the few of you remaining!) may worry that gains like these are nice but unlikely to be repeated. To the contrary, there are two compelling reasons why dividend-paying small bank stocks may still be wildly undervalued.

First, the 10-year rate would likely be trading between 2% and 3% if the Fed weren’t buying bonds. It’s already back up to 1.6% and the taper hasn’t even begun yet! When it does, the benchmark rate will likely challenge 2%+ in 2022. This will be another boon to bank profits.

Second, select bank stocks already have more cash than they know what to do with. This may sound crazy given that their profits have been artificially depressed, but their flush capital ratios say otherwise.

For example, Puerto Rico-based First BanCorp (NYSE:FBP) boasts capital ratios about as high as we ever see (Common Equity Tier 1 is a rock solid 17.3%, where the requirement is just 7%), so FBP is hiking its payout and buying back shares!

Its recent dividend raise of 40% (no typo!) has kickstarted its meandering stock higher. And with more than enough cash to return to shareholders, FBP also bought back 5% of its float (and plans more).

FBP’s Dividend Magnet is Due
FBP-Price Dividend Chart
FBP-Price Dividend Chart

Opportunistic repurchase programs like FBP’s are the gifts that keep giving. Fewer shares make everything—including an already hot dividend—look better on a “per share” basis.

CMA still boasts a favorable dividend magnet setup, too. Sure, the stock has been strong in 2021, but it is only now starting to “catch up” with a payout that has nearly tripled over the last five years:

CMA’s Magnet Finally Starts to Pull, Too
CMA-Dividend Magnet
CMA-Dividend Magnet

Overdue dividend magnets combined with higher taper-driven profits should send these stocks soaring quite soon.

These are the types of “recession-proof” retirement plays that I specialize in. I hate losing money, so I look for dividend stocks that have the wind at their backs. Whether it’s a bull or bear market, I don’t really care, because my downside is that these stocks pay their dividends and “only” gain 15% per year.

On the upside, they could gain 56% like CMA did in just ten months.

I call these “Hidden Yield Stocks” because they seem boring to the uninformed investor. That is ideal for me because safe stocks that double our money are anything but boring!

Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."

Taper Tantrum Dividend Plays

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