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Is This a Good Time to Invest in Dividend Stocks?

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In general, dividend stocks are preferred in volatile markets because they tend to stabilize returns of a portfolio. And this is the reason that most investors have a certain amount of exposure to these stocks. Of course, not everyone can jump into a Dividend Aristocrat (companies that have increased their dividend for a large number of years). Also, newer companies that are seeing their earnings stabilize may start paying a dividend. And it doesn’t pay to close yourself to such opportunities. Therefore, it’s a good idea to keep an eye on newer dividend stocks as well.

In a situation like we have today, where the Fed is expected to continue raising interest rates from their already-high levels, dividend stocks aren’t usually preferred. That’s because treasuries offer risk-free returns. So when those returns are on the rise, treasuries make an obvious choice for investors.

Therefore, if you are considering investment in dividend stocks at this time, it’s best to look for stocks you wouldn’t mind holding for a few years. Also, it’s probably a good thing if the dividend is not your only reason for choosing the stocks. The valuation is worth checking out (as always) and other things like the payment history, the revenue and cash flow history and the projected earnings growth are also important. After all, if you’re banking on dividends as a revenue stream, you need to have a certain amount of confidence about its historical stability and future prospects.

In the light of the above, let’s discuss a few stocks:

Fortescue Metals Group Limited (FSUGY - Free Report)

East Perth, Australia-based Fortescue Metals Group is involved in the exploration, development, production, processing and sale of iron ore mainly in Australia and China. It also explores for copper and gold deposits. Other than its main operations in the Chichester and Solomon Hubs in Western Australia, it holds a portfolio of properties in Ecuador, Argentina, Colombia, Peru, Chile, Brazil, Portugal and Kazakhstan.

The company’s dividend yields 10.01% and the dividend has grown 74.11% in the last five years. While earnings are currently expected to decline in its fiscal 2023 ending in June and also in the following year, it’s worth noting that analysts have raised Fortescue’s estimates very substantially in the last 30 days. The 2023 estimate has increased 48 cents (19.0%).

FS Bancorp, Inc. (FSBW - Free Report)

Headquartered in Mountlake Terrace, WA, FS Bancorp is a holding company for 1st Security Bank of Washington that provides banking and financial services to local families, local and regional businesses, and industry niches. Its two operating segments are Commercial and Consumer Banking, and Home Lending.

The company pays a dividend that yields 2.73%. while not as great as treasury yields, it also promises strong growth, which isn’t what you’d expect from treasuries. In the last 30 days, analysts have raised their 2023 estimate by 46 cents (10.6%). The 2024 estimate has jumped 57 cents (12.6%). FS Bancorp’s dividend has increased 31.26% in the last five years and there’s every reason to believe that the growth will continue.

Bank OZK (OZK - Free Report)

Headquartered in Little Rock, Arkansas, Bank OZK provides various retail and commercial banking services. It offers various deposit products, financing services; mortgage and other lending products; trust and wealth services; treasury management services; ATMs; telephone, online, and mobile banking services; debit and credit cards; safe deposit boxes; and other products and services

Zacks #1 ranked Bank OZK is also seeing strong estimate revisions. For 2023, the estimated EPS is up 34 cents (6.1%) and for 2024, it is up 30 cents (5.3%). Therefore, the company’s dividend, which yields 2.878% right now, having grown 11.73% over the last 5 years, should continue on its growth trajectory.

Cincinnati Financial Corporation (CINF - Free Report)

Fairfield, Ohio-based Cincinnati Financial provides property casualty insurance products in the United States. The company operates through five segments: Commercial Lines Insurance, Personal Lines Insurance, Excess and Surplus Lines Insurance, Life Insurance and Investments. It also offers commercial leasing and financing services; and insurance brokerage services.

The Zacks Rank #2 (Buy) ranked stock is expected to grow both this year and the next. Analysts have raised their 2023 estimate by 66 cents (14.8%) and the 2024 estimate by 92 cents in the last 30 days. This definitely looks like a stock you want to be in. Its 2.17% yield and 6.41% dividend growth in the last five years may not look that enticing. But when paired with the solid growth outlook, these numbers look more than a little attractive.

Clearway Energy, Inc. (CWEN - Free Report)

Princeton, New Jersey based Clearway Energy is a renewable energy business in the United States. It has approximately 5,000 net megawatts (MW) of installed wind and solar generation projects; and approximately 2,500 net MW of natural gas generation facilities.

This Zacks Rank #1 (Strong Buy) stock has seen a 24 cent (19.2%) increase in its 2023 earnings estimates in the last 30 days. A strong growth outlook increases confidence in the continuation of its dividend stream. The company has been paying a dividend for many years although it was lowered in 2019 and remained low heading into the pandemic. But its dividend has grown steadily since 2020 and currently yields 4.48%. It has grown 8.36% in the last five years.

Last Word

It’s perhaps not surprising that in a rising rate environment, the stocks that qualify as good dividend picks are ones that can benefit from the rising rates. Banking and finance companies are therefore well positioned in this market. Additionally, mining stocks with China exposure will benefit from the Chinese reopening and clean energy stocks are long-term gainers of the ever-stronger ESG drive.

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