On Mar 22, long-term treasury yields plunged, causing a yield curve inversion. To be precise, the return on the 10-year Treasury note slipped below the yield on the 3-month Treasury bill for the first time in 12 years. This caused panic among investors since such an inversion is considered to be a reliable indicator of a near-term recession.
However, the decline in long-term yields has been occurring since late 2018. With the Fed taking a decidedly dovish position, market watchers believe that long-term bond returns will continue to remain low in the near term. In such a situation, dividend-paying stocks would prove to be better alternatives.
This is particularly true for those stocks, which are part of the S&P 500 Dividend Aristocrats Index. The index is made up of 57 stocks, which have raised dividend payouts for at least 25 straight years. Adding them to your portfolios would be prudent at this time.
Long-Term Bond Yields Likely to Remain Low
As of Mar 25, yield on the one-year Treasury Bill and its seven-year counterpart stand at 2.41% and 2.32%, respectively. This means an investor would actually be penalized for waiting for six more years, receiving a return which is nine basis points lower. And since the 10-year yield stands at 2.43%, a 10-year long commitment would only yield two more basis points.
And with the Fed likely to maintain a dovish stance going forward, things are likely to remain pretty much the same. Fed Chair Powell now believes that the case for additional rate hikes has “weakened.”
Last week the central bank kept rates unchanged and revealed that it will soon end its attempts to reduce the size of its balance sheet. Economists think that the Fed may even become a net buyer of Treasury securities in the near future.
This clearly indicates that the Fed remains wary of an impending economic slowdown. This will likely continue to boost the demand for long-term bonds, pushing their yields lower in the process.
Dividend Aristocrats Hold the Edge
In such an environment, dividend-paying equities are at an advantage. This is particularly true for those companies, which can increase their payouts substantially over time. The components of the S&P 500 Dividend Aristocrats Index fit the bill perfectly, since they have raised dividends on common shares for 25 straight years.
Also, the index has outperformed the S&P 500 by a wide margin over the past 15 years. In fact, the current dividend yield is of little consequence in this case since this is essentially a long-term growth strategy. And if the current yield is indeed attractive, the return on stocks from the index will be much higher since dividends are also likely to rise consistently.
Last week’s fall in long-term bond yields is a clear sign that an economic slowdown is around the corner. The Fed’s recent actions also indicate such an outcome. This has served to raise the demand for long-term securities, pushing their yields lower.
In such circumstances, stocks paying an attractive dividend would make for a good choice. This is particularly true for members of the S&P 500 Dividend Aristocrats Index. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Cincinnati Financial Corporation (CINF - Free Report) markets property and casualty insurance as its main business.
Cincinnati Financial has increased its dividend payments for 58 consecutive years. It has a dividend yield of 2.7%, while its five-year average dividend yield is 3%. The Zacks Consensus Estimate for current-year earnings has increased 6.1% in the past 60 days. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Target Corporation (TGT - Free Report) operates as a general merchandise retailer in the United States.
Target has a Zacks Rank #2 (Buy). It has increased its dividend payments for 51 consecutive years. Its current dividend yield and five-year average dividend yield are both 3.3%. The Zacks Consensus Estimate for current-year earnings has increased 3.4% in the past 30 days.
AFLAC Inc. (AFL - Free Report) , through its subsidiary – American Family Life Assurance Company of Columbus – provides supplemental health and life insurance.
AFLAC has a Zacks Rank #2. It has increased its dividend payments for 37 consecutive years. It has a dividend yield of 2.2%, while its five-year average dividend yield is 2.4%. The Zacks Consensus Estimate for current-year earnings has increased 1% in the past 60 days.
Sysco Corporation (SYY - Free Report) , through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry.
Sysco has a Zacks Rank #2. It has increased its dividend payments for 48 consecutive years. It has a dividend yield of 2.4%, while its five-year average dividend yield is 2.7%. The Zacks Consensus Estimate for current-year earnings has increased 0.6% in the past 60 days.
V.F. Corporation (VFC - Free Report) designs, manufactures and markets branded apparel and related products in the United States and internationally.
V.F. Corp has a Zacks Rank #2. It has increased its dividend payments for 45 consecutive years. It has a dividend yield of 2.4%, while its five-year average dividend yield is 2.2%. The Zacks Consensus Estimate for current-year earnings has increased 2.2% in the past 90 days.
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