Brexit fears continue to dominate the bond market, with yields falling to historic lows. This has made dividend paying stocks more tempting, especially for income seeking investors. Britain’s decision to exit the European Union (EU) also pushed back hopes of a U.S. interest rate rise to 2018, while rates around the world continue to fall post-Brexit. A low interest rate environment is thus a boon for dividend paying companies.
Treasury Yields Touch Historic Lows
“Brexit Blues” compelled investors to park their money in safe-haven assets such as bonds. This in turn drove bond prices to the stratosphere, dragging down bond yields. U.K.’s decision to leave the EU raised concerns that such an outcome will destabilize the region’s economy, slow down global growth and create fresh bouts of volatility in the financial markets worldwide.
The yield on the benchmark 10-year Treasury note briefly touched its lowest level ever at 1.385% on Friday, while yield on the 30-year Treasury bond closed at a record low of 2.226%, below the previous low of 2.25%, according to Tradeweb (read: Treasury Yields Touch Historic Lows Amid Brexit Fallout).
The decline in treasury yields has made companies that have comparatively higher and stable dividend yields more attractive. Income-focused investors will now turn toward such dividend paying stocks that provide the regular cash they are seeking.
Fed Rate Hike Hopes Dashed
According to Bloomberg data, before the Brexit vote, analysts were counting on at least one rate hike from the Fed this year. But chances of such a rate hike all but vanished due to Brexit woes. Traders are assigning a 0% chance of an increase in rate at the Fed’s next three monthly meetings. In fact, they are assigning a less than 8% chance of a rate hike at all this year (read: The Fed Is Now More Likely to Cut Interest Rates Than Raise Them).
Britain’s decision to leave the EU is expected to create too much of an economic uncertainty for the Fed to keep its plan on track. The Fed Chair Janet Yellen had warned last month that a Brexit would bring a “period of uncertainty” and the possibility of “a period of financial market volatility that would negatively affect financial conditions and the US economic outlook.”
The Fed held short-term interest rates steady in June and indicated a slower approach toward hiking the cost of borrowing in the near future. A low level of business investment and inflation falling short of expectations also did little to help the Fed take a rate hike call.
Low Interest Rates Around the Globe
Interest rates around the world are falling even lower after U.K’s Brexit vote. The European Central Bank (ECB) has trimmed its main interest rate to zero and is pumping in around $1.93 trillion into the banking system by acquiring government and corporate bonds. The Bank of Japan and the Bank of England also cut rates to or near zero and carried out similar programs to boost their economy. Investors are delaying expectations of when interest rates will rise back to more normal levels.
In such an environment of low interest rates across the globe including the U.S., dividend payers become more and more alluring. If rates fall or remain low, share prices of these companies rise. This is because companies that generally have high dividend yields mostly belong to those sectors that have huge debt loads and, in a low interest rate environment, their debt servicing costs don’t go up much since they have to shell out a lower amount of interest. This in turn boosts profitability (read: Do Interest Rate Changes Affect Dividend Payers?).
Buy 4 Best Dividend-Paying Stocks Now
As the Fed funds futures market is now pricing in no rate hike until 2018, thanks to Brexit, it’s time to invest in strong dividend paying stocks. In fact, now the odds of a rate cut are more than a rate hike in the next six months.
As bond yields drop, companies that provide juicy dividends are the most wanted for income seeking investors. Here we have selected four such dividend-paying stocks that have a Zacks Rank #1 (Strong Buy) or #2 (Buy) and a dividend yield of over 3%. The favorable Zacks Rank should help these stocks to continue gaining this year as well.
Southcross Energy Partners, L.P. SXE provides natural gas gathering, processing, treating, compression and transportation services in the United States. SXE is headquartered in Dallas, TX. SXE has a Zacks Rank #2 and offers a whopping dividend yield of 38.7%. SXE’s 5-year historical dividend growth rate is 6.9%.
SunCoke Energy Partners, L.P. SXCP produces and sells coke used in the blast furnace production of steel in the United States. SXCP is headquartered in Lisle, IL. SXCP has a Zacks Rank #2 and offers a promising dividend yield of 19.3%. SXCP’s 5-year historical dividend growth rate is 20.9%.
WhiteHorse Finance, Inc. WHF is a business development company focused on originating loans to privately held small-cap companies across a broad range of industries. WHF is headquartered in Miami. WHF has a Zacks Rank #2 and offers an encouraging dividend yield of 12.9%. WHF’s 5-year historical dividend growth rate is 14.6%.
Rose Rock Midstream, L.P. owns, operates, develops and acquires a portfolio of midstream energy assets. RRMS is headquartered in Tulsa, OK. RRMS has a Zacks Rank #1 and offers a solid dividend yield of 9.7%. RRMS’ 5-year historical dividend growth rate is 35.5%.
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