Key Points
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Top-tier dividend stocks provide what investors need to succeed in the current climate.
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Three dividend stocks especially fit the moment: Coca-Cola, Dominion Energy, and Enterprise Products Partners.
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Even if the Fed doesn’t increase rates and inflation wanes, these stocks should still deliver for investors.
- 10 stocks we like better than Dominion Energy ›
Forget rate cuts. They aren’t coming anytime soon. Instead, the probability of rate hikes is rising, based on Fed funds futures prices.
You can blame it in large part on persistently sticky inflation. The war with Iran continues, keeping oil prices elevated. The longer oil prices remain high, the more likely it is that the prices of other products will increase.
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Some investors could be tempted to run for the hills. Others could stick their heads in the sand. But there’s a better alternative. One type of stock is built to thrive in exactly this kind of environment.
The case for top-tier dividend stocks
Top-tier dividend stocks provide what investors need to succeed in the current climate. By “top-tier,” I’m referring to the stocks of companies that have resilient underlying business models, strong balance sheets, and growing dividends.
Bonds can become more attractive to investors when the Federal Reserve maintains or increases interest rates. However, the stocks of some dividend stocks can compete with bond yields while also offering growth that bonds can’t match.
We don’t have to look far back to see how top-tier dividend stocks perform in a higher-rate environment. During the 2022 bear market, the Fed cranked up rates. The S&P 500 (SNPINDEX: ^GSPC) plunged 19%. But dividend stocks handily outperformed the broader market.
There are several reasons why top-tier dividend stocks are ideal picks when rates rise. For one thing, they’re usually viewed by many investors as safe havens. Their growing dividends can provide a hedge against high inflation. Their businesses also often have pricing power that protects their profit margins from inflationary erosion.
Dividend stocks that fit the moment
I can think of several top-tier dividend stocks that look particularly appealing with today’s dynamics. Each of them checks off all the boxes mentioned earlier.
The Coca-Cola Company (NYSE: KO) arguably stands in a league of its own. It’s a member of the Dividend Kings, a group of companies that have increased their dividends for at least 50 consecutive years. Coca-Cola’s streak of dividend hikes is now at 64 straight years. Its forward dividend yield is a healthy 2.6%. The beverage giant also commands solid pricing power.
Furthermore, Coca-Cola’s stock delivered a nice gain the last time the Fed raised interest rates. So did Enterprise Products Partners (NYSE: EPD). The pipeline stock trounced the S&P 500 in 2022. Enterprise’s business is largely insulated from inflation, with roughly 90% of its long-term contracts containing price escalation provisions.
The midstream energy leader has increased its distribution for an impressive 27 consecutive years. Enterprise Products Partners doesn’t need much unit-price appreciation to deliver a double-digit total return, given its distribution yield of around 5.9%.
Utility stocks also often hold up quite well during periods with the possibility of rate hikes and sticky inflation. I like Dominion Energy (NYSE: D) in today’s market. Granted, Dominion’s share price fell more than the S&P 500 did in 2022. However, the company is in a stronger position now for two key reasons.
First, Dominion enjoys a massive tailwind from the rapid build-out of data centers. Its home state, Virginia, is the world’s hottest data center market. Second, NextEra Energy (NYSE: NEE), the largest utility by market cap, is in the process of acquiring Dominion. The price tag for the deal is almost 15% higher than Dominion’s current share price.
What if the tide turns?
Of course, it’s entirely possible that inflation could wane if the Iran war is concluded soon and oil prices sink. The Fed may not be forced to increase rates after all. Would that mean these three top-tier dividend stocks would become poor choices for investors? I don’t think so.
Coca-Cola still has solid growth prospects, especially in developing markets. The demand for U.S.-produced natural gas should remain strong, boding well for Enterprise Products Partners’ business. Both Enterprise and Dominion are poised to continue benefiting from the explosive data center growth. These three dividend stocks are good picks regardless of interest rate and inflation trends.
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Keith Speights has positions in Dominion Energy and Enterprise Products Partners. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends Dominion Energy and Enterprise Products Partners. The Motley Fool has a disclosure policy.
