Tighten Your Seatbelts! A Rate Hike Might Be Coming in May

While the earnings season is on full throttle, a new theme appears in the market. Investors and economists are betting that another rate hike is just around the corner. These speculations have been influenced by the recent banking sector stress and the Fed’s March 21-22 policy meeting’s highlight on a potential economic downturn and inflation still being stubbornly high.

According to CME’s “Few Watch Tool,” investors expect a 25 basis point increase on the May 3, 2023 meeting. The tool analyzes the likelihood that the Fed will change the Federal target rate at upcoming FOMC meetings based on the pricing of the 30-Day Fed Funds Futures pricing data. The tool shows how investor sentiment has shifted from a low probability hike to an 83.7% probability in a month.

How Can the Interest Rate Hike Affect Investors?

One of the reasons the Federal Reserve raises interest rates is to fight against inflation and slow down the economy like in the current market environment. This prompts most investors to go on the defensive and focus on specific investment strategies that take risk and capital preservation as a central theme - over growth. Some of the common themes investors consider are:
Portfolio Diversification - Investors can spread investments across different asset classes, such as stocks, bonds, etc., to reduce the impact of one asset class on the rest of an investor's portfolio.
Value Investing - Another strategy that shines brightly during downturns is value stocks. Value stocks are stocks that are trading relatively lower than what their fundamentals suggest as their fair price and are one of the ones that benefit greatly when the economy recovers.
Focus on Defensive Sectors - In uncertain times and market turbulence, investors can also tend to focus on healthcare or consumer staples as they provide products and services that people need regardless of economic conditions, similar to how companies in that sector thrived during the Covid-19 pandemic. As a result, these sectors are considered defensive due to their sensitivity to economic changes.
Dividend Paying Stocks - In a high inflationary and rising interest rate environment, dividend stocks provide a steady income stream regardless of market conditions. This helps mitigate losses incurred in other assets or downturns in the market. As a rule of thumb, it is best to focus on companies with a strong history of dividend payments and a solid financial situation, like Dividend Kings and Dividend and Aristocrats.

In this article, let’s focus on one of the themes, dividend-paying stocks. To start, let’s begin with what a dividend is and what are Dividend Kings and Aristocrats.

What Is a Dividend Stock?

Dividend stocks are shares of a company that pays dividends to shareholders. Companies share a portion of their profits with their shareholders as a reward for investing in the company. Companies typically issue dividends to stockholders giving investors a steady income stream. This makes dividend stocks attractive to retirees, supplement regular earnings, or as a strategy during economic downturns. 

Dividend King and Dividend Aristocrat?

Dividend Aristocrats are S&P500 listed companies that have increased their dividends for at least 25 consecutive years. On the other hand, Dividend kings, a rarer title for dividend companies, are US-listed companies paying and have grown their dividends consecutively for at least 50 years. Notably, dividend kings don’t need to be listed on the S&P 500, so there will be cases where a dividend king is not a dividend aristocrat.

Let’s look at 3 Dividend Kings currently offering the highest dividend yields on the list.

Altria Group (MO)

Dividend Yield: 8.27%

Altria Group is an international tobacco company with a market capitalization of $83.48 billion. 

Founded in 1902 and headquartered in Richmond, Virginia, United States, the company employs over 6,300 people. Its popular brands include Marlboro, Chesterfield, and L&M.

Altria Group primarily sells oral tobacco products and smokeable products. Among its accessories are cigarettes made and sold by Philip Morris USA Inc. and machine-made cigars and pipe tobacco by John Middleton Co. Altria Group Distribution Company, Helix Inventions LLC, Philip Morris Capital Corporation, and Altria Client Services LLC are further add-ons. The business offers deals and distribution services, support services, and various financial tools.

Altria Group has an annual dividend yield of 8.27% and a 5-year dividend growth rate of 44.88% and declared its first quarterly dividend for the year of $0.94, payable 04/28/2023. MO has continuously increased its dividends for 53 straight years.

3M Company (MMM)

Famous for Post-It notes, the 3M Company is a conglomerate with operations in over 70 countries. It was founded in 1902, and the company has been essential during COVID-19, as it produces various products used in the healthcare industry, including face masks and hand sanitizer.  

Today, the company creates and markets a range of goods and services in four different segments: 

• Consumer, 
• Health care,
• Transportation and electronics, and 
• Safety & Industrial. 

Products like abrasives, artificial bonds, videotapes, and particular safety gears are under Safety and Industrial. Transportation safety equipment and systems for the automotive and aerospace sector are under the Transportation and Electronics segment. Oral care, medical diagnostics, and health information systems are under the Health Care Segment. Consumer health and safety products, office inventories, consumer respirators, etc., for its Consumer Care Segment. 

3M has an annual dividend yield of 5.62% and a 5-year dividend growth rate of 26.81%. Based on its historical disclosures, MMM is expected to announce its next dividend payment in the 2nd week of May, and the company has continuously increased its dividends for 65 consecutive years. 

Universal Corporation (UVV)

Dividend Yield: 5.82%

Universal Corporation is a tobacco leaf supplier company that operates in 2 main segments: Tobacco Operations and Ingredients Operations. The company supports farmers of different origins by contracting, offering agronomy support, and financing. UVV uses a plant-based ingredients platform to provide vegetable and fruit-based ingredients, botanical extracts, and flavorings to human and pet food markets. UVV’s segment functions are:

• Tobacco Operations – includes contracting, procuring, financing, storing, and shipping leaf tobacco to manufacturers of consumer tobacco products.
• Ingredients Operations – provides a range of plant-based ingredients for both human and pet consumption to its business-to-business customers.

Universal Corp has an annual dividend yield of 5.82% and a 5-year dividend growth rate of 46.01% and has declared its 2nd interim dividend for $0.79 last Feb 1, 2023, and will be paid to stock investors by May 1, 2023. UVV has continued to increase its dividends for 51 years and is part of the elite dividend kings list.

Final Thoughts

This year has been challenging for most investors as inflation has been continuously high, interest rates continue to rise, a looming recession, according to economists, and the recent banking scare has significantly affected portfolio returns. Having a good grasp of the market theme is one of the ways any investor can stay ahead of the curve and know how to respond to shifts in market sentiment, as this can mean the difference betweek being the one early on the trend or the one left holding the bag.

 

More Stock Market News from Barchart

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• The IPO Market Flops, Worst Quarter in Over 20 Years
• Stocks Pressured as Bond Yields Climb on Inflation Concerns
• Big Tech’s Race to Rule Healthcare

On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.