Companies Hiking Dividends Should Blow Away Treasury Bonds in the Years Ahead

It is far from a secret that there are risks to the great 10-year recovery. With the United States and China deep in a trade war, and with slowing global growth and negative interest rates in Japan and Europe, now the markets have grapple with a much stronger possibility that President Trump will be impeached. The problem this brings for investors and savers alike is that we all have to keep doing what we need to do to prepare for the future: save and invest. This is even more complicated than ever, with ultra-low Treasury yields now that the bull market in stocks is over 10 and a half years old.

In the decades past, investors could have just taken the easy road, taking their gains from stocks and buying intermediate to long-term Treasury yields. But with growth slowing, and with those negative yields in Europe and Japan, it almost feels like an insult for investors to buy Treasuries outright. After all, how can you build a nest egg for your future by collecting almost 1.7% interest for a 10-year Treasury note and barely 2.1% for a 30-year Treasury bond?

24/7 Wall St. recently offered eight Treasury bond alternatives for investors who need income in 2019 and beyond. One theme that was prominent in that effort is the so-called Dividend Aristocrats. These are the companies within the S&P 500 Index with a history of hiking dividends for 25 consecutive years or more. These companies have proven repeatedly, even during the Great Recession, that they know how to keep raising dividend payments through good times and bad. To put into further context over how impressive a 25-year or longer streak is, note that there have been three U.S. recessions since 1990.

As of this summer, 57 companies listed as “aristocrats,” and the yield has been running close to 2%. Assuming equity prices rise over time as they always have, the future effective yield at any given day’s purchase price will be higher as these dividends are raised. If you purchase these now with a 2% yield, that is better income on a static basis than a split between the 10-year and 30-year Treasuries, and that income should continue to rise every year. It is impossible to predict the future stock market prices, particularly when the market keeps challenging all-time highs, but most investors still assume that stock prices will be higher in a decade.

The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is the top exchange-traded fund tracking the Dividend Aristocrats. It is up 17.6% so far in 2019. The year-to-date gains for the broader market indexes have been 15% for the Dow Jones industrials and 18% for the S&P 500.

In the past few trading sessions alone, multiple dividend hikes have been announced. 24/7 Wall St. has looked for solid companies raising payouts that are generally outyielding Treasuries and that are viewed to have a cheap share price against most Wall Street analyst projections.

American Express Co. (NYSE: AXP) raised its quarterly payout to $0.43 per share from $0.39. That is a 10.3% hike, and the new payout and a $118.59 share price bring a 1.45% yield. While that might seem impressive compared with the huge banks, Refinitiv’s consensus analyst target price of $132.63 implies that Amex may be undervalued. It still blows away the yields offered by Visa and Mastercard.

Lockheed Martin Corp. (NYSE: LMT) authorized a fourth-quarter 2019 dividend of $2.40 per share, which is a $0.20 per share hike that represents a payout hike of 9%. That generates a 2.47% yield, based on a recent $388.00 share price. Lockheed Martin also added $1 billion for share buybacks. The defense contracting giant handily outyields the 30-year Treasury, at a time when global tensions are hot, and the $396.60 consensus target price leaves some upside. The street-high target price is up at $440.

McDonald’s Corp. (NYSE: MCD) continued to deliver on its shareholder capital return ambitions with an 8% dividend hike. The new quarterly dividend of $1.25 per share, part of its Velocity Growth Plan driving long-term value, is close to a 2.35% yield, based on a $213.16 share price. On top of that outyielding the 30-year Treasury, this marked the 43rd consecutive year that McDonald’s has raised its dividend. The consensus target price of $233.00 also implies close to another 10% upside in the coming year, and presumably the company will manage to grow in the decade ahead.

State Street Corp. (NYSE: STT) has sold off handily from its highs due to yield curve concerns and lower Treasury yields in general. That said, the custodial bank raised its payout by 10% to $0.52 per share (from $0.47). The $59.80 share price is down from a 52-week high of $87.79 (and from $106.00 at the end of 2017), and it will represent close to a 3.50% yield. Collecting more than a full point above the 30-year Treasury yield should add some comfort as the bank looks to recover its lost ground. Also, the consensus target price is $63.00.

Texas Instruments Inc. (NASDAQ: TXN) turned on nearly a 17% hike to its quarterly payout. This company makes chips for just about everything, many of which may come with zero tariff concerns over time. The dividend hike to $0.90 per share per quarter (from $0.77) and a $127.14 share price will generate a 2.83% yield for new investors. With a consensus target price of $129.19, Merrill Lynch just pointed out that free cash flow here makes the shares worth $154 rather than its prior $145 price objective.

While it is impossible to predict where share prices will be at any given time in the future, most investors tend to agree that share prices will be higher one decade out, even if the market is still close to all-time highs. That even assumes there will be a recession at some point.