Three Income Stocks to Buy Before The Fed Lowers Rates

 

Traders have been clamoring for the Fed to lower interest rates for most of the last year.

The reason is simple.

Cheap money is always good for the market.  For example:

  1. Lower interest rates make borrowing cheaper for companies. This means companies will expand their businesses, which is good for their stocks.
  2. Lower interest rates drive investors into the market to find alternatives to bonds and other low yielding securities. That creases demand for stocks.
  3. Lower interest rates drive more consumer spending as we can all go out and finance our purchases for less. That spending drives profits to companies bottom lines and into the economy.

But there’s a certain type of investor that doesn’t like lower rates, I call them “income foragers.”

Income Foragers Investors that are searching high and wide for the best yield on their money.  They’ve spent the last two years buying CDs getting 5.3% with their money sitting at the bank, those days are coming to an end in 2024.  And when they do, the high yield dividend stocks are going to see one of the largest migrations of cash into them and the ETFs that they are held in.

Calamos, an investment company, recently commented on CNBC that the ETF industry should be targeting the Income Foragers as they come out of their CD and Money Market hibernations.

What makes this better is that you know this information now!

I’ve always said that the best way to beat the market is to be early to a long-term trend, exactly like the one that will develop in high dividend yielding stocks over the next two years.

That in mind, a few rules that I use on dividend yields.

The most important: “buy the stock, not the dividend.”

Investors go right to a stock filter and pull up the highest dividend yield stocks and start throwing darts at those names.  Guess what, they’re paying that high “yield” because the price of the stock has cratered.

Investing in a high dividend yield stock that is in a long-term bear market is what I refer to as losing money safely.  You may collect 13% in dividend yield while the stock is losing 27% in value each year.

Believe me, I have stories, don’t make me share them.  Use common sense here.

Let me get you started.  Here are three stocks that are in a long-term bull market trend.  All three also have healthy fundamentals, meaning that the companies are making money and are on the path to continue making money.

Keep in mind, you may not get 6-7% yield on these names, but if the company is tacking on another 8-10% in stock price return a year, you’ll be asking yourself why you were holding CDs in the first place.

Here we go.

iShares Select Dividend ETF (XLY)

Keep it Simple is sometimes the best approach.  The iShares Select Dividend ETF (XLY) invests in 99 dividend yielding companies like Altria (MO), AT&T (T) and Keycorp (KEY).  The balance of 99 companies helps DVY shares minimize “headline risk” while providing instant diversification for its investors.

Average returns over the last 5 years come in at 7.4% with 10 year returns of 8.5%.  Remember 2020 was rough for the ETF as it faced a moonshot in interest rates and a bear market at the same time.  Still, the yield on the XLY adjusted higher during that time.

This is by far the easiest of the “buy it and forget it” approaches to fulfilling your portfolio income needs.

Keycorp (KEY)

You’ll note that Keycorp (KEY) is on the list above of companies held by the DVY.

Regional banks like Keycorp (KEY) have struggled to trade higher over the last two years as interest rates have provided a double whammy.  First, the company is paying more interest to those depositors with cash in their bank.  Second, the bank’s loan volume has slowed as a result of higher interest rates.

The squeeze is common in a rising rate environment, but there’s a light at the end of the tunnel.

Lower rates will begin to draw more loan business to the banks, resulting in higher revenue from loan activity.  At the same time, rates paid on deposits will decline sharply, meaning the money that they are loaning will carry less expense.

The stock pays a 5.46% dividend yield at current prices.  Keep in mind that the yield, not the dividend payment, will move lower as KEY shares move higher.

Shares of KEY just moved back into a long-term bull market trend, with 50% in gains overhead before the stock would return to its 2022 highs.  This is an attractive growth & income stock for those aggressive Income Foragers.

Philip Morris International Inc. (PM)

OK, I know, Big Tobacco isn’t on one of those lists of social responsible stocks, but that’s the reason that I look at it in situations like this.

The “Vice Stocks” tend to do well during bear markets or a slowdown in the economy.  The reason is simple, people enjoy their vices like smoking and drinking when times are “tough”.  Phillip Morris has long been a company that the market flocks to when looking for “safe harbor” from the market’s storms.

The stock yields 5.23% with a PE Ratio of 19.  Every aspect of the long-term view on the stock remains bullish as shares are breaking to new all-time highs.  Phillip Morris shares see intermediate-term volatility over the long-term, but the long-term returns provide well for share’s owners.  The average annual gain (simple return) for Phillip Morris shares over the last ten years is just 8%.