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FA Center: These 20 dividend-paying stocks get a double boost from declining interest rates

Bonds will do well if U.S. interest rates decline in coming months. What you may not appreciate is that dividend-paying stocks are likely to do even better.

That’s because dividend payers possess a powerful combination of both bond-like characteristics and equity-like growth potential. Like bonds, dividend-paying stocks benefit from declining interest rates. Unlike bonds, those dividend-yielding stocks also benefit from lower interest rates because they cause the discounted value of their future earnings to increase.

During declining-rate months, dividend stocks on average did more than twice as well as 10-year Treasurys.

To document this double-barreled benefit, I segregated all months since 1927 into two groups: Those in which the 10-year Treasury BX:TMUBMUSD10Y rate (or equivalent) declined from the previous month, and those in which the rate rose. On average in the declining-rate months, a portfolio containing the 10% of stocks with the highest yields rose at an annualized rate of 22.7%. During the rising-rate months, in contrast, this portfolio gained just 5.0%. (These returns are courtesy of a database from Dartmouth College professor Ken French.)

The comparable returns for 10-year Treasurys, in contrast, are 9.4% and 0.4%, respectively. (These bond returns are courtesy of a database maintained by Yale University professor Robert Shiller.) So during declining-rate months, dividend stocks on average did more than twice as well as 10-year Treasurys.

To be sure, a portfolio of 10-year Treasurys will have lower volatility than a portfolio of high-yielding stocks, even when interest rates are declining. So the extra return that those stocks produce above and beyond bonds during declining-rate environments is not totally a free lunch. But what is clear is that dividend payers are a better bet when interest rates are falling than when they’re rising.

The key to dividend stocks’ bond-like quality is that their dividends aren’t slashed when interest rates decline. That’s not always the case with lower-quality stocks, whose high yields often indicate an imminent dividend cut. But financially sound blue-chip companies are loathe to cut their dividends, often going to great lengths — including going into debt — to avoid doing so.

For that reason, it’s important to take financial quality into account when choosing dividend-paying stocks. With that thought in mind, I mined the database of stocks that are recommended by at least two of the top-performing newsletters that my performance auditing firm monitors. Below are the 20 stocks in that database with the highest recent dividend yields, listed in descending order of their yields. (Data courtesy of FactSet.)

Stock Dividend yield
TC Energy Corp (TRP) 7.9%
Keycorp New (KEY) 7.7%
Kohls Corp (KSS) 7.3%
Columbia Bkg Sys Inc (COLB) 7.3%
Truist Finl Corp (TFC) 7.0%
Walgreens Boots Alliance (WBA) 6.7%
Bank N S Halifax (BNS) 6.7%
Leggett & Platt Inc (LEG) 6.5%
Simon Ppty Group Inc New (SPG) 6.4%
Foot Locker Inc (FL) 6.3%
Crown Castle Inc (CCI) 6.1%
Citizens Finl Group Inc (CFG) 5.9%
Comerica Inc (CMA) 5.9%
3M Co (MMM) 5.9%
International Paper Co (IP) 5.4%
Prudential Finl Inc (PRU) 5.4%
Dow Inc (DOW) 5.2%
Fifth Third Bancorp (FITB) 5.1%
PNC Finl Svcs Group Inc (PNC) 5.0%
Suncor Energy Inc New (SU) 5.0%

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Now’s the time to own dividend-paying stocks. These 5 offer up to a 9% yield.

Plus: These 20 dividend stocks have been the best income growers in the S&P 500

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