Back to top

Image: Bigstock

4 Blue-Chip Dividend Stocks to Buy in September

Read MoreHide Full Article

Fed officials have made much hue and cry about the possibility of a rate hike in September. However, weak factory sector data have diminished chances of the same. Manufacturing activity showed a slowdown in August, ahead of the much awaited August jobs data release. Also, we are into that part of the year when returns have been historically low, while stocks remain pretty pricey. The future is also cast into uncertainty, thanks to the upcoming presidential elections.

Such as stalemate in interest rate hikes along with volatility in the broader markets calls for investing in blue chip dividend stocks. Such stocks have tremendous financial strength and are not affected by market vagaries.

Weak Manufacturing Wanes Odds of Rate Hike

According to the Institute for Supply Management, its manufacturing index dropped to 49.4 in August from 52.6 last month. Any reading below 50 indicates contraction in manufacturing activity. In fact, the index fell below that level for the first time since February. Other key gauges on new orders, production and employment were also below the 50% mark (read more: Key manufacturing report slides into contraction territory, ISM says).

The productivity of the American business and workers also fell 0.6% in the second quarter instead of 0.5%, according to the revised government figure. U.S. companies failed to increase productivity  despite generating plenty of jobs.

In the wake of this scenario, odds of a September rate hike fell to a one in four as a risk-averse Fed is more likely to wait for further information before hiking rates. Last Friday, chances of a rate hike had risen to one in three following Fed Chair Janet Yellen’s hawkish tone at the Jackson Hole economic symposium.

Treasury Yields Erase Increase

Diminishing chances of a rate hike led to increase in bond prices since the fixed interest and principal payments stated in the bond will tend to become less attractive. As bond prices rose, yields on such bonds declined. The 10-year Treasury note ended at 1.570% on Sep 1, after climbing above 1.6% for the first time this week. The Treasury market has been choppy for quite some time now and the 10-year Treasury yield has stuck within a range of 1.5% to 1.6%.

The yield on the 2-year Treasury note, which is more sensitive to rate hike expectations, also lost 0.4 basis points to 0.790%. In the meantime, amid low and even negative yields in Europe and Japan, the U.S. yields need more than just upbeat jobs report to scale higher. Further guidance from Bank of Japan and the European Central Bank may stand in good stead for them (read more: What is the Treasury Yield?).

With bonds providing little yields, income seeking investors will turn to dividend paying stocks for reliable returns (read more: 3 Stocks With More Than 300% Dividend Growth Over the Last 5 Years).

September: Historically Awful

The stock market has just entered the worst month this year, as far as historical data is considered, with both the S&P 500 and the Dow usually closing in the negative. September’s terrible record is just not limited to two or three years, instead stocks have been persistently posting unimpressive performance, with the month’s average turning out to be discouraging in all but one of the dozen decades since the late 1800s.

Moreover, low trading volumes prevalent in the market indicate a correction going ahead. Add to this the CBOE Market Volatility Index (VIX) trading below 20, and we all know that the market is headed for a rough patch since low volatility often precedes a sell-off (read more: 5 Best Stocks to Buy for a Dreadful September).

Thanks to this bearish scenario, dividend stocks are presently quite attractive bets. Companies that consistently pay dividends are in a better position to brave market downturns. Also, they are expected to safeguard investors against the impending uncertainty that is likely to aggravate in the light of the U.S. presidential elections in November (read more: Here's How Presidents and Elections Affect the Stock Market).

4 Hot Blue-Chip Dividend Stocks

Blue chip dividend stocks boast solid financial structure and healthy underlying fundamentals, and are unperturbed by market turbulence. Such stocks are deemed to be much safer and more durable than an average stock. Most of these companies raise their dividends for many years as well and are typically large in size (e.g. market caps exceeding $10 billion). Needless to say, the possibility of a rate hike ebbing in the near term has already made them quite tempting.

We have selected four blue chip dividend stocks that boast a Zacks Rank #2 (Buy) and a dividend yield of over 2%. The search was also narrowed down with a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Principal Financial Group Inc. (PFG - Free Report) provides retirement, asset management, and insurance products and services to businesses, individuals, and institutional clients worldwide including the U.S. Principal Financial has a VGM score of ‘B’. The company has a dividend yield of 3.3%. Principal Financial’s 5-year historical dividend growth rate is 23.7% (read more: Principal Financial's Capital Management Remains Impressive).

L Brands Inc operates as a specialty retailer of women’s intimate and other apparel, beauty and personal care products, and accessories. L Brands has a VGM score of ‘B’. The company has a dividend yield of 3.2%. L Brands’ 5-year historical dividend growth rate is 24.5% (read more: L Brands Tops Q2 Earnings, Updates Views, Stock Gains).

Macy’s, Inc. (M - Free Report) , together with its subsidiaries, operates stores, websites, and mobile applications in the United States. The company has a VGM score of ‘A’. Macy’s has a dividend yield of 4.2%. and a 5-year historical dividend growth rate of 30% (read more: Why Macy’s Could Be a Top Value Stock Pick).

Magna International Inc. (MGA - Free Report) develops, manufactures, engineers, supplies, and sells automotive products. The company has a VGM score of ‘A’ and a dividend yield of 2.5%. Magna International’s 5-year historical dividend growth rate is 16.3% (read more: Magna International Beats on Q2 Earnings & Revenues).

Confidential: Zacks' Best Investment Ideas 

Would you like to see a hand-picked ""all-star"" selection of investment ideas from the man who heads up Zacks' trading and investing services? Steve Reitmeister knows when key trades are about to be triggered and which of our experts has the hottest hand. Click for his selected trades right now >>   

Published in