Here's What to Do Before the Fed Rate Cut Next Week

The bond market is about to rally as the U.S. Federal Reserve prepares to cut rates next week.

Are you ready?

In preparation for the long-telegraphed Fed rate cut, investors are wondering what to do next.

The decision might not be theirs.

The central bank is grappling with stubbornly low inflation and global interest rates that are spiraling lower.

It was beyond hopeful thinking in 2018 that resulted in the Fed tightening monetary policy with a series of rate hikes. That includes its last hike in December 2018.

Less than a year later, and we have a reversal of fortune.

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What gives? It's a reasonable question.

The prevailing wisdom is that the economy is in trouble, maybe even big trouble.

Many are calling for a big response, like a 50-basis-point cut.

If the central bank is that bold, the reaction in the bond market will not be conducive to those searching for yield.

Even though rates domestically are near historical lows, they can always fall further.

With inflation essentially non-existent, negative interest rates might be in play down the line.

What is a saver to do?

For those looking for income, the response is to buy dividend stocks.

Already expensive by most measures, dividend stocks will be attractive as the bond yield falls.

A 50-basis-point rate cut will signal to the market that all is not well in the economy.

When future growth is in jeopardy, rates will sink.

It may seem preposterous given how low rates are to begin with, but the idea of even lower rates is now the pathway of least resistance.

The best thing that can happen for those interested in a return to normal in the bond market (whatever that means) is for the Federal Reserve to not raise rates.

That's not happening.

If it does, the stock market will go ballistic with investors rapidly selling shares.

It would be a major tantrum.

So, we can safely assume that rates will be cut and the search for yield will be on... again.

I loathe such forced contrivance, but it is what it is.

We have to play the cards that are dealt.

The name of the game will be to buy dividend stocks and do so before they become exorbitantly priced.

Is that even possible?

As always, I'll turn to the Money Morning Stock VQScore™ system to find value in the markets.

Here's the best dividend stock to add to your portfolio now...

The Best Dividend Stock to Buy Before the Fed Rate Cut

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Despite expensive valuations, investors need to stay true to fundamentals.

Most dividend stocks today trade for insane multiples.

We're talking about multiples of earnings that are well above 20 and expected earnings growth below 10%.

For example, one of the most popular dividend stocks at the moment is Philip Morris International Inc. (NYSE: PM).

The tobacco company pays a dividend of 5% - very rich indeed.

That would explain why Philip Morris trades for 17 times current-year expected earnings, earnings that are poised to grow by 8% from this year to the next.

Ideally, the best stocks to own trade for multiples of earnings that are below their growth rate. It's an obvious challenge for anyone looking to own a dividend stock in advance of the Fed cutting rates.

My suggestion, with the guidance of the VQScore, is to lower my sights in terms of dividend.

Since yields are falling across the board, a lower yielding dividend stock is the way to go.

One stock that fits the bill is electronics company, AVX Corp. (NYSE: AVX).

It's our pick for the best dividend stock to buy before the Fed rate cut, and it yields just under 3%.

That might not be as rich as other dividend stocks, but when alternative yielding instruments collapse, that 3% gets more and more attractive.

The best part about buying AVX is the valuation.

While investors have been focused on higher-yielding dividend stocks like Philip Morris, they have mostly ignored a stock like AVX.

That's why AVX is one of the highest-rated VQScore stocks today.

Shares trade for only 12 times current-year estimated earnings.

With earnings expected to grow by 8% from the current year to the next, the valuation in AVX is far from excessive.

In fact, I would argue that shares are cheap in a falling interest rate environment like what we have today.

From a growth perspective, AVX is in the sweet spot of an exploding industry.

The company is a key player in the sensor device market including automobiles.

In the long term, with autonomous driving on the near horizon, future sales and earnings growth at AVX is quite high.

The combination of an attractive yield and future growth potential make AVX a stock to own in advance of the Fed rate cut coming next week.

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