The markets continue to perform well, shrugging off the ever-present stream of worries of persistent financial calamity in Europe. As markets have shown since the 2008-2009 downturn, stocks can display remarkable resilience, climbing a wall of worry to breach new heights. Consequently, skittish investors wary of a potential correction may be looking for any reason they can to sell their stocks and head for the sidelines.
The Fed to the rescue
While there are never guarantees in the investing world, market participants got at least one vote of confidence from our Federal Reserve on March 20. The U.S. central bank reaffirmed its monetary policy, keeping interest rates at record lows and continuing its bond buying program. The Federal Reserve Open Market Committee plans to leave interest rates at zero and purchase $85 billion in debt every month until the unemployment rate falls to 6.5% and inflation reaches 2.5%.
As a result of the Fed’s decision, investors can, at least for the time being, put their worries of a sudden interest rate hike aside. Were the central bank to reverse its long-held quantitative easing policy, then whether to sell fully valued dividend stocks would be a discussion worth having. After all, should interest rates rise, equities would likely suffer. Corporate borrowing costs would increase, and a rise in yield for traditional fixed income products would make stocks as an investment seem less attractive in general.
Keep pocketing those quarterly checks
In the wake of the Fed’s stand-still on monetary policy, those fat dividend yields from America’s blue-chip stocks are still worth holding. Some of the market’s most valuable and well-known companies, such as Chevron Corporation (NYSE:CVX), Lockheed Martin Corporation (NYSE:LMT), and AT&T Inc. (NYSE:T), provide big dividend yields even amidst this environment of historically low interest rates.
Last year, Chevron increased its dividend 11%, marking the company’s 25th consecutive year of a dividend bump. Furthermore, the company has paid uninterrupted dividends for the last century. Chevron Corporation (NYSE:CVX) yields around 3% at recent prices, and the company is due to offer investors another dividend increase in time for its next quarterly payout.
Lockheed Martin Corporation (NYSE:LMT) offers investors a track record of dividend increases that any company would love to boast. Over the past five years, the stock has raised its dividend at a compound annual growth rate of 22%. Lockheed Martin Corporation (NYSE:LMT) is committed to returning serious cash to shareholders, and currently yields 5% at recent prices.
AT&T Inc. (NYSE:T) doesn’t have the same level of dividend growth as either Chevron Corporation (NYSE:CVX) or Lockheed Martin Corporation (NYSE:LMT), as the stock has raised its distribution at a 2% clip over the past five years. However, it offers investors a comfortable 5% yield and a relatively recession-proof business model. People tend to watch TV and use their phones even when the economy isn’t doing well. This is evidenced by the fact that AT&T Inc. (NYSE:T) has low volatility: the beta on the stock is only 0.39.
Undervalued dividend stocks are still attractive
Making things even better, these stocks appear to be favorably valued, even after such a broad market rally over the past few years. Chevron Corporation (NYSE:CVX) and Lockheed Martin Corporation (NYSE:LMT) trade for price-to-earnings ratios of 9 and 11 times, respectively, significantly below the roughly 17 multiple of earnings on the S&P 500. AT&T, meanwhile, generated record operating cash flow last year, and the stock trades for an adjusted P/E ratio of 16 times.
Since these stocks trade for compelling valuations and pay hefty dividend yields in excess of the yield available on the broader market, investors would be wise to consider adding these equities to their portfolios. The investing case for these stocks is further enhanced by the Federal Reserve’s recent decision to keep its foot firmly pressed on the monetary gas pedal. These stocks offer the potential for a one-two punch of capital gains and high dividend income, an unbeatable combination to build wealth over time and secure your financial future.
The article The Fed’s Decision Is Your All-Clear Signal to Buy These Stocks originally appeared on Fool.com and is written by Robert Ciura.
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