Investing

Fed Will Raise Rates This Week: 5 Top Dividend Total Return Stocks to Own

Lee Jackson

Published: September 25, 2018 9:40 am

Last Updated: January 11, 2020 5:23 pm

Higher interest rates are generally bad for bondholders if they hold longer dated debt with lower coupons, and that has been the case for many as overall interest rates have been historically low for years. One area that income investors can look to is dividend-paying stocks, as they provide total return possibilities.

We like to remind our readers about the impact total return has on portfolios because it is one of the best ways to help improve the chances for overall investing success. Again, total return is the combined increase in a stock’s value plus dividends. For instance, if you buy a stock at $20 that pays a 3% dividend, and it goes up to $22 in a year, your total return is 13%: 10% for the increase in stock price and 3% for the dividends paid.

Income-minded investors with a higher risk tolerance for dividend-paying equities can still find solid value even in today’s pricey market. We screened the Merrill Lynch research database and found five companies are rated Buy, and pay outstanding regular and dependable dividends of at least 4%.

AT&T

This stock has been absolutely hammered and may be a great total return play. AT&T Inc. (NYSE: T) is the world’s largest provider of pay TV, with TV customers in the United States and 11 Latin American countries. In the United States, the AT&T wireless network has the nation’s self-described strongest 4G LTE signal and most reliable 4G LTE.

The company also helps businesses worldwide serve their customers better with mobility and highly secure cloud solutions. Trading at a very cheap 8.9 times estimated 2019 earnings, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic but increased device financing plans.

The telecom giant reported mixed second-quarter results. However taking into account new assets from the Time Warner acquisition, AT&T raised its full-year earnings guidance to the high end of the $3.50 range, versus the $3.40 analysts had estimated.

AT&T shareholders are paid rich 5.9% dividend. Merrill Lynch has a $37 price target from the shares, and the Wall Street consensus target is $35.91. The shares closed trading Monday at $33.91.

Altria

Shares of this maker of tobacco products and wine have been hit hard and offer value investors a great entry point. Altria Group Inc. (NYSE: MO) is a top mega-cap consumer discretionary stock to buy, and the company’s Marlboro brand remains one of the most recognizable in the world. Many Wall Street analysts concede that the stock has solid downside support owing to the generous dividend yield, which remains at a huge premium in relation to the 10-year Treasury rate.

Cash flow generation and the return of cash to Altria shareholders remain key facets of the company’s total shareholder return plan. The analysts expect continued support of the strong dividend, in addition to continued share repurchase activity. The board also raised the dividend by 8.2% in 2017.

To diversify away from cigarettes and cigars, Altria has expanded its portfolio into new categories like wine and e-cigarettes, and the company also has a 9.6% stake in Anheuser-Busch InBev.

Altria investors receive a 5.24% dividend. Merrill Lynch has a $70 price target, while the consensus estimate is $66.59 The stock closed trading on Monday at $61.06.

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Duke Energy

Duke Energy Corp. (NYSE: DUK) operates as a regulated utility company in the United States and is based in Charlotte, North Carolina. The company operates regulated electric utilities in the Midwest, Florida and the Carolinas and supplies electric service to approximately 7.5 million residential, commercial and industrial customers. Duke owns 50,000 megawatts of capacity.

The regulated gas utilities serve more than 1.6 million customers in the Carolinas and Ohio. A commercial arm owns contract renewables and pipelines across the United States.

Merrill Lynch upgraded the stock in June and noted why:

We upgrade shares to Buy and raise our price target as we up estimates are a victim of large-cap regulated utility sell-off. Wall Street still does not believe management at $5.19 versus the Merrill Lynch estimate of $5.35 and implied range of $5.30-5.60. Story has been sizably de-risked in North Carolina, trading at 3-yr low and a 15% discount to peers on 2020 price to earnings.

Shareholders receive a 4.66% dividend. The $86 Merrill Lynch price target compares with the $84.50 consensus target and the most recent close at $79.61 a share.

HSBC

This is a top international financial and a solid purchase for growth and income accounts. HSBC Holdings PLC (NYSE: HSBC) is the leading cross-border international banking group, with particular strength in Asia, but also the United Kingdom, Middle East and the Americas. Regional franchises are largely focused on retail and business banking in the U.K. and Hong Kong home markets.

With more than $50 billion in revenues and over $180 billion in capital, HSBC is one of the largest global banks. It operates in more than 65 countries across four main business segments: Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets and Global Private Banking. More than half of its revenue comes in Asia, followed by Europe at about 30%.

Investors receive a 6.12% dividend. Merrill Lynch has a price target of $51.71. Because the posted consensus target is the same, so it’s safe to assume the Merrill Lynch target is the only one available. The shares closed on Monday at $44.65.

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Kraft Heinz

Kraft Heinz Co. (NYSE: KHC) was formed almost three years ago via the merger of H.J. Heinz and Kraft Foods. The company is the leading global food company, with $29 billion of annual revenues generated by well-known brands such as Kraft, Heinz, Oscar Mayer and Maxwell House.

The company is the third largest food and beverage manufacturer in North America, and it derives 76% of revenues from that market and 24% from International. The company’s many brands also include ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta.

Shareholders are paid a 4.42% dividend. Merrill Lynch has set its price target at $85. The consensus target is $67.81, and shares closed Monday at $56.52.

These five top companies are liquid, pay big dividends and look like safe havens as the market volatility continues to churn. Needless to say, a massive market sell-off will take everybody down, but these five will weather the storm better than tech momentum darlings, and they make sense for income and growth investors as rates edge higher.