The Fed Extends the Allure of Dividend Stocks

 | Sep 20, 2013 | 10:00 AM EDT
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On Wednesday, the Federal Reserve surprised investors by deciding to not start tapering its monetary policy yet. After five years of quantitative easing, the market was expecting tapering in the initial range of $10 billion to $15 billion in bond purchases per month. After this decision to continue easy monetary policy, bond yields began to decline, and stock prices rose.  

We believe this continued easing is a shot in the arm for high-dividend stocks.

Indeed, among the sectors that immediately rose after the policy announcement were energy and electric utilities, as investors believed that the Fed's continued easy monetary policies would strongly benefit these areas. We would agree. Some of the names that we find very attractive are Chevron (CVX) and Conoco-Phillips (COP) in energy and Duke Energy (DUK) and Consolidated Edison (ED) among utilities.

We believe that all of these stocks have reasonable growth prospects and above-market dividend yields and still trade at attractive prices.  

Chevron is a standout high-dividend name that should benefit from an environment of lower interest rates and high dividend yields. The stock is trading at a more than reasonable 9.8x 2013's EPS estimate of $13.00 and 8x 2014's EPS estimate of $15.70. Chevron also has a healthy 3.2% dividend yield that investors should find very appealing.  

ConocoPhillips is another energy provider and high dividend payer that should also benefit from a lower-interest-rate environment and investors' quest for high-yielding names. The stock is reasonably valued at 12x 2013's EPS estimate of $5.80 and 10.9x 2014's EPS estimate of $6.40. ConocoPhillips also has a safe and extremely generous 4% dividend yield. This should continue to get the attention of more investors as Fed easing continues.

Among utilities, we believe that Duke Energy is particularly attractive. The stock is trading 10% below its recent highs, though the Fed's affirmation of lower interest rates should incentivize investors back into it. Duke's shares are reasonably valued at 15.7x 2013's EPS estimate of $4.31. The company also has a very favorable 4.6% dividend yield.

Lastly, Consolidated Edison, like Duke, should benefit from the Fed's affirmation of lower interest rates. ConEd's shares are reasonably valued at 15.1x 2013's EPS estimate of $3.75 and 14.7x 2014's EPS estimate of $3.85. ConEd also has a very attractive 4.4% dividend yield.  

Many investors had been moving away from higher dividend stocks, assuming that the Fed would announce a tapering program in September. That the Fed did not do so surprised the market and throws a renewed and attractive spotlight on these stocks. We have spoken favorably of these stocks as "all weather" stocks. It appears that the weather will remain balmy for dividend stocks for the foreseeable future.

Two others that we also like here but don't have room to discuss today are General Mills (GIS) and Merck (MRK). More to come on them in the next few weeks.

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