Rising Interest Rates and All, 13 Blue Chips Outyield 10-Year and 30-Year Treasuries

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After a series of stops and starts throughout the Federal Reserve’s interest rate hiking cycle, the eventual rise in long-term interest rates finally has started to play out in 2018. The 10-year Treasury has blown through that 3.0% yield that had acted as a ceiling for so long. More importantly, the 30-year Treasury’s long bond yield is now even approaching the 3.5% level. And this is all happening at the same time that the Dow Jones industrial average and the S&P 500 have yet again hit all-time highs.

While many equity investors have a fear of rising interest rates and a never-ending worry that equity prices are vulnerable to a correction, there are always some bright spots to consider. First is that the recent rise in interest rates is because the economy is surging under higher gross domestic product (GDP) growth and lower unemployment. Another issue to consider, particularly now with a trade pact done with Mexico and Canada, is that a trade war in China will actually hurt China more than it hurts the United States. And there is also the notion that inflation is now running at roughly the higher-end of the Fed’s target rate.

24/7 Wall St. looks for pockets of companies where investors can hide out in during periods of uncertainty, rising interest rates or when economic growth might not be at its full potential. Specifically, we are identifying companies with dividends that are currently higher than the 10-year Treasury note (almost 3.20%) and the 30-year Treasury bond (3.35%).

What was interesting about the most recent move in higher interest rates is that long-term yields have risen roughly the same number of basis points (25 or so) as short-term rates since mid-September. The Federal Reserve moved to hike its federal funds rate by 25 basis points at the end of September.

When considering pockets of stocks versus bonds, investors need to understand that the yields on the Treasury debt are effectively considered to be risk-free and that they are also locked in yields until maturity. And just like bond yields, the yield and price are inverted in nature for stocks too in a steady dividend model — as share prices rise, the yield comes down, and as share prices fall, the yield increases.

When comparing these long-term bond yields to stocks and their dividends, investors have to weigh where the economy is likely to head over the coming 10, 20 or even 30 years. If there are well-established companies with decades of operating histories and a history of raising their dividends, then what is the long-term value of a stock’s potential appreciation (capital gains) and what is likely to happen to its dividend over time? Stocks are never considered risk-free investments like the Treasury securities, if held to maturity, so the risk has to be considered versus the guarantee.

Most investors believe that equity prices in general gradually will rise over longer time horizons. There is an entire 100 years or more of modern economic history backing up this theory. And that includes the recent Great Recession, the Great Depression and even World War II. Most investors also believe dividends will rise over time as companies continue to earn more money. Again, there are no guarantees, and there can be quite violent interruptions that interfere with many of the long-term growth forecasts. That said, when investors can still get safe dividend yields that are higher than the longest maturing Treasury yields, then it means that there are still opportunities in stocks over the long term.

In our screening of stocks with higher dividend yields than both the 10-year and 30-year Treasury, we set a floor of a $20 billion market capitalization rate. Most companies are above $50 billion, and many are higher than $100 billion in market caps. We also have a stable dividend screen and these companies had to be easily recognized names, so there are no unknown companies. Also eliminated from the mix was the vast number of real estate investment trusts and utilities, which could have been counted because those sectors tend to attract investors the most when interest rates are lower.

All these companies currently have a dividend yield of at least 3.4%. Some of these yields are considerably higher. We have included the share price and dividend yield, market caps, a trading range and the Thomson Reuters consensus analyst price target. Additional color and commentary also have been included around each company for additional references.

The following are 13 companies with solid dividends that currently yield more than both the 10-year Treasury note and the 30-year Treasury bond.