First, companies that regularly borrow a lot of money (like REITs and utilities) now have to pay more to do so. Second, money market accounts, CD’s and short-term bonds are actually paying meaningful returns for the first time in a decade, offering a competitive alternative to dividends.
However, higher interest rates don’t have to sound the death knell for all dividends. By looking for the companies whose earnings expectations have actually been rising of late, you can sometimes find a healthy yield today and a business that is either resilient to, or even benefits from higher rates.
Rising Rate Defender No. 1: All Signs Pointing North
Compass Diversified Holdings (CODI) is a specialty finance company, with strategic investments in small- and mid-sized consumer and industrial businesses. Camelbak and Sterno are a couple of the company’s more notable recent holdings.
Business has been good, as revenue increased year-over-year at nine of Compass’ 10 business subsidiaries in the second quarter and EBITDA grew by more than 5%. The company is also on solid financial ground, having secured $1.5 billion in financing earlier this year. Management reduced some borrowing costs and locked in other rates well into the next decade.
Consensus profit estimates have been rising over the past weeks and months, but what stands out is that the company is expected to post 14% expected compound earnings growth over the next three years. Acquisitions are an integral part of Compass’ growth–all four add-on purchases that management has made for existing portfolio businesses in 2018 are expected to be immediately accretive to cash flow.
The company has maintained a steady dividend of $0.36 a share (8% yield) for the past several quarters, but could have the room to potentially increase the payout in 2019, with borrowing rates locked in and annual profit expected to top $2.
Rising Rate Defender No. 2: Smarter Than the Average mREIT
Starwood Property Trust (STWD) is a mortgage-centric REIT that has protected itself from higher interest rates through diversification. The company is the largest commercial mortgage REIT in the U.S, which is a business that is usually squeezed by rising interest rates.
That said, 95% of Starwood Property’s lending portfolio is floating-rate and management says that a 1% increase in LIBOR would actually increase annual cash flow by $0.06 a share. The company also generates about 40% of its profit from other businesses, including CMBS investing/servicing and operating over 120 company-owned properties.
In addition, Starwood Property bought GE Capital’s Energy Project Debt Finance business this past August. The $2.6 billion purchase is expected to immediately add to earnings.
The company’s estimates have been increasing since the Spring, as it has exceeded consensus earnings expectations six straight quarters. Management has consistently paid a quarterly dividend of $0.48 a share (8.8% yield) in recent years, but that could move higher in the future, given Starwood Property’s rare positive leverage to rising interest rates.
Higher earnings could lead to future dividend increases for these two companies, but what can you do to protect your savings and retirement income from interest rate increases that are already here today?
Fight Rising Rates with These 7 Dividend Growers
Conventional market wisdom says that dividend stocks get hurt when interest rates rise; but that doesn’t have to be the case, if you know where to look.
Dividend growth is the name of the game if you’re going to keep up with both rising interest rates and potential inflation.
It may sound too good to be true, because growth investors and income investors don’t usually see eye to eye. Income seekers want the security of 5%-plus annual dividend yields, while growth hounds think that cash should be reinvested back into the business- because a solid earnings report can send a stock up more than 5% in one day.
We’re here to tell you it’s possible to have both while combating rising interest rates, and my colleague Brett Owens can show you how, with his simple (and safe) way to earn 12% a year from stocks with “hidden yields.”
At that rate, your money will double every six years and keep well ahead of inflation. Plus you can triple the retirement income that most dividend aristocrats or “safe” fixed income investments currently offer.
How do we accomplish this? Brett has discovered a key relationship between dividends and price gains that allow investors to find both growth and income in “hidden yields”.
Companies that consistently grow their dividends over time tend to outperform. The trick is the best dividend stocks almost never show high yields, because stock gains tends to track the size of dividend increases. If a company increases its dividend by 10% and the higher yield brings new buyers in, it often will send the price up and the yield back down toward where it started.
The hard part is finding the right investments to begin with and Brett has a list of 7 stocks that offer such “hidden yields.” These companies provide a solid dividend today, with the potential to keep growing that payout over the next several years. It’s easy to fixate on a stock’s dividend history or its current yield, but in a rising interest rate environment, the real value lies in how much that payout can grow in the future.
What starts out as a 2%, 3% or 4% yield today grows each time a company raises its dividends. You could easily end up earning 10% or even 20% a year just from rising dividends … because your original amount of invested money never changes!
The Vanguard Dividend Appreciation ETF (VIG) closed at $110.70 on Friday, up $0.17 (+0.15%). Year-to-date, VIG has gained 8.94%, versus a 9.38% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Contrarian Outlook.