The Federal Reserve (Fed) is the central bank of the U.S., responsible for regulating banks, implementing monetary policy, and maintaining the financial system's stability. One aspect of the latter is controlling the country's inflation levels, which can broadly be done by adjusting interest rates.
The Fed has been increasing interest rates since March 2022 to combat rising inflation. As of mid-November 2023, the Fed's target interest rate range is 5.25% to 5.50%. This can be a gift and a curse, though. The curse is that it makes debt like credit cards, mortgages, and auto loans more expensive. The gift is that fixed-income investments like bonds now offer higher interest rates.
With high interest rates, investors may naturally gravitate toward bonds because of their low risk and predictable returns. However, this shift may overlook another compelling option: dividend stocks. Altria Group (MO -0.37%) and AT&T (T 1.02%) could provide better options for investors eyeing long-term growth and steady income.
MO Total Return Level data by YCharts.
The power of dividend stocks
Bonds' great selling point is their predictability; you know exactly how much interest you'll earn and when you'll earn it. If you buy a one-year $1,000 bond with a 5% coupon rate, you know you'll earn $50 that year. Because of their volatility, the same can't be said about stocks.
Despite that, dividend stocks offer a two-for-one benefit that bonds don't. They pay out dividends (which can be viewed as interest) and have the chance for stock price appreciation. If you invest $1,000 into a stock with a 5% dividend yield that increases 5% in a year, you'll earn at least $100.
To be fair, the opposite could also happen. Dividend stock prices can fall, but the difference is you'll still earn your dividend (in most cases).
Altria and AT&T offer lucrative dividend yields
Both Altria and AT&T offer some of the highest dividend yields in the S&P 500.
| Company | Quarterly Dividend | Trailing-12-Month Dividend Yield |
|---|---|---|
| Altria | $0.98 per share | 9.5% |
| AT&T | $0.28 per share | 7.1% |
Data source: Google Finance. Dividend yield as of Nov. 16, 2023.
If Altria's and AT&T's yields remain the same for a year, investors could make $95 and $71 in dividends, respectively, from a $1,000 investment. And, unlike bonds, dividends can grow over time. If you buy a 10-year bond with a 4% coupon rate, you'll receive 4% annually over those years regardless.
If you invest in a dividend stock, there's a good chance the dividend increases annually. For example, Altria recently increased its quarterly dividend by 4.3%, marking the 58th increase in the past 54 years. In the past 10 years alone, the dividend has increased by 104%.
MO Dividend data by YCharts.
Spin-offs and restructuring have made AT&T's dividend a bit more sporadic, but prior to its dividend slash in 2022, it had increased its annual dividend since May 1998 (with the exception of three quarters in 2003).
You can't forget sustainability
Offering a high dividend is nice, but it doesn't matter much if it's unsustainable. You want to ensure a company is positioned to pay its dividend over the long haul. Altria and AT&T have been and will continue to be around for decades.
Altria is the country's largest tobacco company, owning some of the industry's best-known brands. Some may be concerned about the slowdown in smoking rates among U.S. adults, but Altria has proven it has the pricing power to offset lower volume.
AT&T is one of the world's largest telecom companies. Although it has admittedly had some recent missteps, it has refocused on its core offerings and is making positive strides. In today's world, telecom services -- whether internet, mobile, or satellite -- are no longer a luxury for most people; they are a necessity.
This isn't to say bonds aren't a good choice during times of high interest rates, but stocks like Altria and AT&T offer compelling long-term alternatives.
