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Play 4 High-Yield Stocks as Fed Looks Less Hawkish
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Fed officials at their July meeting played the waiting game with rate hike. Even though some officials argued that a strengthening labor market and diminishing near-term risks to the economy call for a rate hike, others refrained from adopting a hawkish stance as inflation continues to tread below the Fed’s targeted range.
Since chances of a rate hike is still low, bond prices rose while their yields declined. Thanks to the drop in Treasury yields on a less hawkish Fed, high-yield paying stocks are grabbing the spotlight.
Fed Minutes Read as Less Hawkish
Fed’s July meeting minutes showed that some policymakers vouched for a rate hike soon as the labor market nears full employment; while the majority agreed that more positive data is required to initiate such a move. Though Fed officials agree that near-term risks to the U.S. economy including concerns over Brexit have subsided, they believe factors like weak economic outlook for China and the failing conditions of European banks raise concern.
According to the minutes, several officials are not confident that inflation will rise to its target level of 2%. Inflation has been below the desired level for the last four years. The minutes released on Wednesday echoed the statement that the Fed had released after its July meeting (read more: 4 Utility Stocks to Play as Fed Keeps Rate Hike on Hold).
Inflation Holding Back Rates
Stubbornly slow rate of inflation is primarily responsible for Fed’s decision to withhold a rate hike for now. The Fed had raised rates from near zero levels in December and was supposed to nudge rates up four times this year. Nevertheless, the Consumer Price Index (CPI) remained unchanged last month; a sign that shows inflation remains tepid, according to the Labor Department. It was also the first time in five months that CPI failed to move north (read more: U.S. Consumer Prices Unchanged in July as Fuel Costs Ease).
Cost reduction in the service sectors and energy products also indicate that the inflation rate will remain weak. The producer-price index (PPI) that measures what firms pay ranging from dairy products to warehousing dropped at a seasonally adjusted rate of 0.4% in July from the prior month, its first decline since March and the largest since Sep 2015.
And lest we forget, the Fed’s preferred gauge of inflation, the personal consumption expenditure (PCE) index rose to 0.1% in June, significantly lower than its requirement. The index has also been persistently below the target range over the past year. Moreover, the core-PCE inflation that excludes food and energy prices holds at 1.6% (read more: What is the Core PCE price index?).
Odds of a Rate Hike Low, Bond Yields Drop
Following the Fed’s minutes, the market is pricing in an 18% chance of a rate hike in September, while a rate hike in December is still hovering around 50%, according to CME Group’s FedWatch tool. St. Louis Fed President James Bullard also believes that since U.S. economic growth is trending below the 2% mark, unemployment hasn't shown any remarkable decline and inflation is tame, the interest rate has chances of staying low.
As odds of a rate hike still remains low, bond prices have been on the rise. Notably, interest rates and bond prices generally have an inverse relation. But, bond yields, which is the return an investor realizes on a bond dropped due to rise in prices. Yields and debt prices move in opposite directions. The 10-year Treasury note settled at 1.558% on Wednesday, below 1.566% ahead of the release of the minutes (read more: What is Bond Yield?).
High-Yield Stocks in Focus: 4 Choices
Companies that have comparatively higher and stable dividend yields are more attractive, thanks to the decline in Treasury yields. Income-focused investors will now turn toward dividend paying stocks that provide regular cash inflows.
By the way, high-yield stocks that offer higher dividend yield than the 10-year US Treasury note are attractive picks. This is because investors can expect growth, which is important as higher growth promises greater returns. Moreover, such a yield will add to cash inflows which will allow investors to buy more shares especially in a falling market (read more: 5 Reassuring Dividend Stocks to Beat August Scare).
We have selected four such high-yield stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy). Also, such stocks have 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 scores. Such a score allows you to eliminate the negative aspects of stocks and pick winners.
Seagate Technology plc (STX - Free Report) designs, produces and distributes electronic data storage technology and solutions in the United States and internationally. The company has a Zacks Rank #2 and a VGM score of ‘B’. Seagate Technology has a dividend yield of 7.76% and a 5-year historical dividend growth rate of 27.7%.
Macy's, Inc. (M - Free Report) operates stores, websites and mobile applications in the United States. The company has a Zacks Rank #2 and a VGM score of ‘A’. Macy's dividend yield stands at 3.71% while its 5-year historical dividend growth rate is 30%.
QUALCOMM Incorporated (QCOM - Free Report) develops, designs, manufactures and markets digital communications products and services in the United States and internationally. The companyhas a Zacks Rank #2 and a VGM score of ‘B’. QUALCOMM has a dividend yield of 3.42% and its 5-year historical dividend growth rate is 22.7%.
Nordstrom Inc. (JWN - Free Report) is a fashion specialty retailer that offers apparel, shoes, cosmetics and accessories for men, women and children in the United States and Canada. The company has a Zacks Rank #1, a VGM score of ‘A’ and a dividend yield of 2.81%. Nordstrom’s 5-year historical dividend growth rate is 11.36%.
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Play 4 High-Yield Stocks as Fed Looks Less Hawkish
Fed officials at their July meeting played the waiting game with rate hike. Even though some officials argued that a strengthening labor market and diminishing near-term risks to the economy call for a rate hike, others refrained from adopting a hawkish stance as inflation continues to tread below the Fed’s targeted range.
Since chances of a rate hike is still low, bond prices rose while their yields declined. Thanks to the drop in Treasury yields on a less hawkish Fed, high-yield paying stocks are grabbing the spotlight.
Fed Minutes Read as Less Hawkish
Fed’s July meeting minutes showed that some policymakers vouched for a rate hike soon as the labor market nears full employment; while the majority agreed that more positive data is required to initiate such a move. Though Fed officials agree that near-term risks to the U.S. economy including concerns over Brexit have subsided, they believe factors like weak economic outlook for China and the failing conditions of European banks raise concern.
According to the minutes, several officials are not confident that inflation will rise to its target level of 2%. Inflation has been below the desired level for the last four years. The minutes released on Wednesday echoed the statement that the Fed had released after its July meeting (read more: 4 Utility Stocks to Play as Fed Keeps Rate Hike on Hold).
Inflation Holding Back Rates
Stubbornly slow rate of inflation is primarily responsible for Fed’s decision to withhold a rate hike for now. The Fed had raised rates from near zero levels in December and was supposed to nudge rates up four times this year. Nevertheless, the Consumer Price Index (CPI) remained unchanged last month; a sign that shows inflation remains tepid, according to the Labor Department. It was also the first time in five months that CPI failed to move north (read more: U.S. Consumer Prices Unchanged in July as Fuel Costs Ease).
Cost reduction in the service sectors and energy products also indicate that the inflation rate will remain weak. The producer-price index (PPI) that measures what firms pay ranging from dairy products to warehousing dropped at a seasonally adjusted rate of 0.4% in July from the prior month, its first decline since March and the largest since Sep 2015.
And lest we forget, the Fed’s preferred gauge of inflation, the personal consumption expenditure (PCE) index rose to 0.1% in June, significantly lower than its requirement. The index has also been persistently below the target range over the past year. Moreover, the core-PCE inflation that excludes food and energy prices holds at 1.6% (read more: What is the Core PCE price index?).
Odds of a Rate Hike Low, Bond Yields Drop
Following the Fed’s minutes, the market is pricing in an 18% chance of a rate hike in September, while a rate hike in December is still hovering around 50%, according to CME Group’s FedWatch tool. St. Louis Fed President James Bullard also believes that since U.S. economic growth is trending below the 2% mark, unemployment hasn't shown any remarkable decline and inflation is tame, the interest rate has chances of staying low.
As odds of a rate hike still remains low, bond prices have been on the rise. Notably, interest rates and bond prices generally have an inverse relation. But, bond yields, which is the return an investor realizes on a bond dropped due to rise in prices. Yields and debt prices move in opposite directions. The 10-year Treasury note settled at 1.558% on Wednesday, below 1.566% ahead of the release of the minutes (read more: What is Bond Yield?).
High-Yield Stocks in Focus: 4 Choices
Companies that have comparatively higher and stable dividend yields are more attractive, thanks to the decline in Treasury yields. Income-focused investors will now turn toward dividend paying stocks that provide regular cash inflows.
By the way, high-yield stocks that offer higher dividend yield than the 10-year US Treasury note are attractive picks. This is because investors can expect growth, which is important as higher growth promises greater returns. Moreover, such a yield will add to cash inflows which will allow investors to buy more shares especially in a falling market (read more: 5 Reassuring Dividend Stocks to Beat August Scare).
We have selected four such high-yield stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy). Also, such stocks have 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 scores. Such a score allows you to eliminate the negative aspects of stocks and pick winners.
Seagate Technology plc (STX - Free Report) designs, produces and distributes electronic data storage technology and solutions in the United States and internationally. The company has a Zacks Rank #2 and a VGM score of ‘B’. Seagate Technology has a dividend yield of 7.76% and a 5-year historical dividend growth rate of 27.7%.
Macy's, Inc. (M - Free Report) operates stores, websites and mobile applications in the United States. The company has a Zacks Rank #2 and a VGM score of ‘A’. Macy's dividend yield stands at 3.71% while its 5-year historical dividend growth rate is 30%.
QUALCOMM Incorporated (QCOM - Free Report) develops, designs, manufactures and markets digital communications products and services in the United States and internationally. The companyhas a Zacks Rank #2 and a VGM score of ‘B’. QUALCOMM has a dividend yield of 3.42% and its 5-year historical dividend growth rate is 22.7%.
Nordstrom Inc. (JWN - Free Report) is a fashion specialty retailer that offers apparel, shoes, cosmetics and accessories for men, women and children in the United States and Canada. The company has a Zacks Rank #1, a VGM score of ‘A’ and a dividend yield of 2.81%. Nordstrom’s 5-year historical dividend growth rate is 11.36%.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>