One of the major economic headlines over the past few weeks has been the guessing game over who will succeed Ben Bernanke as the next head of the Federal Reserve. Recently, news reports have suggested that Janet Yellen, current vice chairwoman of the Fed, is in line to succeed Ben Bernanke as the next leader of our central bank.
Janet Yellen is well-known in the financial community for her staunch support of the Fed's unprecedented steps to resuscitate the economy. As a result, if she is to become chairwoman of the Federal Reserve, stocks may run higher.
Stocks stand to benefit
If the Federal Reserve is to continue its policies of low interest rates and monthly asset purchases, stocks will likely be major beneficiaries for a number of reasons. First, lower interest rates mean a reduced debt burden for most companies and, consequently, more profits to go around for shareholders. Second, if interest rates stay low, dividend yields (the equity equivalent of an interest rate) would stay low as well. And because stock prices and yields move in opposite directions, that means higher equity prices down the road.
Specifically, those companies that pay high dividend yields become that much more valuable. This stands to reason, as fixed-income and traditional bank products, such as certificates of deposit, pay little in interest in the current environment. A few stocks that pay generous yields, such as PepsiCo (NYSE: PEP), Johnson & Johnson (NYSE: JNJ), and Altria Group (NYSE: MO), are even more attractive.
Investors sick of paltry payouts on other securities would likely flock to stocks such as these. These three companies maintain strong track records of rewarding shareholders with rising dividend payments. PepsiCo has increased its dividend for 41 years in a row and yields nearly 3% at current prices. Johnson & Johnson is the gold standard among dividend payers: It has increased its payout for a remarkable 50 years in a row. And Altria, for its part, has given investors 47 dividend raises in the last 44 years and yields a hefty 5% at recent prices.
Moreover, these companies already have more than enough profitability to back up their generous payouts, which should only improve if the Federal Reserve keeps its foot firmly pressed on the monetary gas pedal.
PepsiCo holds a diverse portfolio of well-known brands, including Frito-Lay, Gatorade, and Quaker Oats, and its revenue is evenly split between food and beverages. In all, PepsiCo holds 22 brands that bring in at least $1 billion each in annual sales. Pepsi's diverse product portfolio contributed to 17% growth in second-quarter core earnings per share, along with 4% organic growth.
Johnson & Johnson is simply one of the highest-quality companies on the planet. Its operations are diversified among medical devices, pharmaceuticals, and consumer products. Some of its universally known consumer brands include Band-Aids and Listerine. This helped J&J post 8.5% sales growth in the second quarter to nearly $18 billion in all.
As far as Altria is concerned, while there's broad concern over the decline in smoking, its management is extremely effective in generating new revenue streams from its smokeless products and its wine and beer businesses. All told, the company maintains a dividend payout ratio below 80%, meaning there's room for future dividend increases.
Monetary policy serves as a tailwind
If Janet Yellen is to succeed Ben Bernanke, it wouldn't at all be a surprise to see the stock prices of America's biggest, most profitable companies rise. Aggressive policies designed to stimulate inflation and economic growth will likely result in higher profits for the world's best companies. Multiple expansion can't be ruled out as a potential scenario, either, as the market would most likely be willing to pay more for stocks with generous dividend yields in a low-rate environment.
As a result, investors may be wise to take cues from the Federal Reserve and plan their investments accordingly. Yield plays stand to win big if the central bank maintains its extremely easy monetary policy. It's likely that a Federal Reserve under Janet Yellen would continue to attempt to juice inflation by any means necessary, and if so, PepsiCo, Johnson & Johnson, and Altria should profit handsomely.
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