3 Dividend Growth Stocks to Trump the Fed
April 02, 2015 – by Richard Band
I’ve already advised you to prepare for higher interest rates, courtesy of the Federal Reserve, in 2015. However, one class of stocks has little to fear from the modest rate increases I foresee over the next 12 – 18 months. I’m talking about companies that can boost their dividends, over the long run, faster than the cost of living.
By the end of the decade, in fact, I predict that many of these dividend growth stocks will trade considerably higher than today’s levels. Reason: Millions of retiring Baby Boomers will be flocking to income vehicles with proven, inflation-beating track records.
There’s just one fly in the salsa, though. Many dividend-growth stocks are expensive by historical standards. In other words, they feature skimpy yields going in.
For real protection against rising rates, you need stocks that not only hold out the prospect of ample “pay hikes” in years to come but also throw off a generous yield up front. A 1% yield won’t look particularly appealing in a rising-rate environment, even if the company is jacking up the dividend at a double-digit annual pace.
Fortunately, a handful of stocks today still combine good yields and strong growth prospects. Here are three dividend growth stocks to buy now:
Dividend Growth Stocks to Buy – AbbVie Inc (NYSE:ABBV)
I’ve been wary of ABBV up to now, because AbbVie depended heavily (about two-thirds of sales) on a single product — the arthritis drug Humira.
However, on Mar. 5, ABBV announced plans to take over Pharmacyclics, Inc. (NASDAQ:PCYC) in a stock-plus-cash deal valued at $21 billion.
While pricey, the Pharmacyclics acquisition will give ABBV half-ownership of Imbruvica, a blockbuster blood-cancer medicine (already FDA-approved) that some Wall Street analysts believe will eventually rack up annual sales of $7 billion.
The Pharmacyclics takeover lays to rest my worries about AbbVie’s growth trajectory over the next five years. Meanwhile, ABBV stock yields a liberal 3.4% — a third more than the longest-dated Treasury bond.
Dividend Growth Stocks to Buy – Procter & Gamble Co (NYSE:PG)
After coming out of retirement to take back his old post in 2013, CEO A.G. Lafley has put Procter & Gamble Co (NYSE:PG) — the maker of Tide, Pampers and Crest — through a rigorous pruning.
Last August, PG announced it would dispose of as many as 100 low-margin brands, keeping only a core list of products that contribute more than 90% of Procter & Gamble’s profit.
Now, Lafley is planning to give another five to 15 brands the heave-ho. According to a Mar. 16 Bloomberg story, PG may even sell or hold initial public offerings for a bunch of its beauty lines, which represent 23% of the Procter & Gamble’s $83 billion annual sales.
It will take time for these initiatives bear fruit for PG, but I already expect productivity improvements to drive a double-digit increase in operating earnings per share in fiscal year 2015 (ends June 30).
Why, then, isn’t Procter & Gamble stock flying over the moon? Because, at the moment, the super-strong dollar is crimping PG’s overseas profits (translated back into dollars). Indeed, PG is experiencing its heaviest foreign-exchange losses ever in this fiscal year.
But the dollar won’t continue to climb ad infinitum. Sooner or later the trend will reverse, and PG’s reported earnings will leap ahead. Meanwhile, Procter & Gamble is taking advantage of the lull in PG stock to buy back $5 billion worth of shares in fiscal year 2015. We’ll follow suit, in our own small way!
In early April, I look for PG to declare its 59th consecutive annual dividend hike, and Procter & Gamble is currently yielding 3%.
Dividend Growth Stocks to Buy – Toronto-Dominion Bank (NYSE: TD)
Canada’s oil producers are taking it on the chins. So far, however, the energy slump has left a negligible impact on the country’s banks.
Impaired loans remain sparse at Toronto-Dominion Bank (NYSE: TD), tallying a mere 0.57% of gross loans as of Jan. 31 (that’s down from 0.62% a year ago). Moreover, in a sign of management’s positive outlook for the year ahead, TD just raised its dividend a hefty 8.5%.
Frankly, I’m more concerned about a potential downturn in the red-hot Canadian housing market. Canada, though, has always maintained stricter mortgage-underwriting standards than the U.S., and homeowners aren’t allowed to walk away from their mortgages. The liability “sticks” to the borrower personally, the way student loans do in the U.S.
Thus, I’m confident TD will be able to ride out any housing tremors with its dividend intact. Toronto-Dominion Bank current yields 3.8%.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won nine Best Financial Advisory awards from the Specialized Information Publishers Foundation.