U.S. equity market has had a stellar return so far this year. In fact, since the financial crisis in 2009, investors have pocketed stupendous returns. In those nine years, a $9,000 investment in the S&P 500 has turned into $49,200.
However, recently, a number of market pundits are concerned that the bull runs that have sent the bourses to record highs might soon come crashing down. And why not? Rise in interest rates, likelihood of a new tech bubble and a pricey stock market are potential bottlenecks to investors’ hard-earned money. Valuation measures such as price-earnings ratios are increasing caution.
Amid such uncertainty, investing in dividend aristocrats seems prudent, as they provide higher total returns with lower volatility, which are undoubtedly the ‘holy grail’ of investing. Such companies are also likely to make the most of the tax reform legislation and a steadily growing economy.
Will You Have Money in Your Pocket as Fed Raises Rates?
As widely expected, the Federal Reserve raised short-term interest rates for the third time this year. The benchmark lending rate was hiked by a quarter percentage point to the range of 1.25-1.5%. In fact, Fed officials expect to raise rates at a steady pace in the coming years. The median expectation for rate hikes next year is pegged at three, at least two in 2019 and two more in 2020 (read more: Fed Hikes Rates: Top 5 Winners for 2018).
Looming interest rate hikes mostly spell bad news for stock markets. Given that a rate hike will force consumers and business houses to pay more to borrow money it will eventually leave them with less money to spend.
Tech Bubble, Overvaluation Concerns
That said, a possibly bigger threat to the stock market is the bubble developing in the tech space. Silicon Valley’s major players including Apple Inc. AAPL, Microsoft Corporation MSFT and Amazon.com, Inc. AMZN are currently the three largest companies in the world in terms of market capitalization.
Even though stellar growth of Apple, Microsoft and Amazon have given a boost to the stock market, their sheer size is a threat to the market if they start faltering. Moreover, experts believe that chances of these declining in the near future are a lot higher, as most technology stocks including these are priced too high compared to what they earn. This replicates the late Nineties, when the stock market was plagued by the so-called ‘dotcom’ bubble burst.
In fact, two-third of the money managers finds the U.S. stock market’s recent record run unsettling. The gains in the current nine-year-old bull market are nearly 300%. This is now the second-strongest bull run since World War II, trailing only to a massive gain of 417% during October 1990 and March 2000, per data compiled by LPL Financial and FactSet Research Systems Inc. This year, the 30-stock Dow Jones has set record highs 70 times, the broader S&P 500 hit highs 53 times and the tech-heavy Nasdaq continues to hover near the coveted 7,000 mark.
Time to Buy Dividend Aristocrats for 2018
Given such an uncertain scenario, if you have money, where should you invest? Buy dividend aristocrats as they have tremendous financial strength and are immune to market vagaries. They reflect solid financial structure and healthy underlying fundamentals. They have also raked in excellent risk-adjusted returns over the last decade.
Dividend Aristocrats generated an annualized return of 9.7% in the last 10 years, easily topping the broader market’s 6.3% rate. During this period, dividends accounted for 31% of the market’s total return, highlighting their importance in determining total shareholder return.
President Trump, meanwhile, has successfully persuaded Congress to pass the $1.5 trillion tax reform bill that could boost economic output by 3% to 4%. This in turn could act as a catalyst for dividend aristocrats to grow even further (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks).
5 Solid Choices
We have, thus, selected five such dividend aristocrats to boost your returns. Such stocks also possess a Zacks Rank #2 (Buy). The favorable Zacks Rank should help these stocks gain further this year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Brown-Forman Corporation BF-B manufactures, bottles, imports, exports, markets, and sells various alcoholic beverages worldwide. The company has raised its dividend for more than 25 straight years. Brown-Forman has a dividend yield of 1.17%, while its five-year average dividend yield is pegged at 9.47%. The company’s expected growth rate for the current year is 13.9%, ahead of the industry’s estimated return of 11.9%. The stock’s expected earnings growth for 2018 is 7.8%.
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Wal-Mart Stores, Inc. WMT operates retail stores in various formats worldwide. Wal-Mart Stores’ first dividend was $0.05 per share, paid in 1974. It has increased its dividend each year since, and now has a dividend yield of 2.08% while its five-year average dividend yield is pegged at 3.75%. The company’s expected growth rate for the current year is 2.5% against the industry’s projected negative return of 2.2%. The stock’s expected earnings growth for the next year is 5.9%.
3M Company MMM operates as a diversified technology company worldwide. The company has raised its dividend for 50 straight years. 3M has a dividend yield of 2%, while its five-year average dividend yield is pegged at 16.86%. The company’s expected growth rate for the current year is 11.5%, higher than the industry’s estimated return of 9.4%. The stock’s expected earnings growth for 2018 is almost 8%.
Cintas Corporation CTAS provides corporate identity uniforms and related business services primarily in North America. The company marked its 43th consecutive annual dividend hike, including a 22% increase on Oct 17 this year. Cintas has a dividend yield of 1.03%, while its five-year average dividend yield is 18.6%. The company’s expected growth rate for the current year is 19.6%, more than the industry’s estimated return of 15.6%. The stock’s expected earnings growth for the next year is 13.2%.
S&P Global Inc. SPGI provides independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide. It provides independent ratings, benchmarks, analytics and data to the capital markets. The company has paid a dividend each year since 1937. S&P Global has a dividend yield of 0.98%, while its five-year average dividend yield is 9.75%. The company’s expected growth rate for the current year is 24.4%, higher than the industry’s projected gain of 11.4%.The stock’s expected earnings growth for 2018 is 9%.
Zacks Editor-in-Chief Goes ""All In"" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
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