Dividend stocks tend to struggle in high-interest-rate environments. The core reason is investors have an abundance of low-risk, high-yield income options when interest rates spike.
Conversely, fund managers have historically pivoted to top-tier dividend stocks when interest rates fall. The logic behind this trend is that dividend stocks ought to deliver superior returns to risk-free assets like U.S. T-bills in low-rate environments.
Which dividend stocks should investors load up on before the Federal Reserve starts to cut rates? Although there are scores of options, Abbott Laboratories (ABT 0.42%) and Medtronic (MDT +0.03%) have proven for decades to be an investor's best friend in terms of dependable dividend checks that keep increasing in size every year. Here's a rundown of the most crucial aspects of each company's value proposition, dividend mechanics, and risk factors.
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Abbott Laboratories: A proven value creator
Abbott Laboratories is a healthcare company with significant assets in high-growth markets like metabolic diseases and cardiac devices. Its shares trade at 22.3x forward earnings, which is in line with benchmark indexes like the S&P 500.
The company faces fierce competition in key segments like diabetes care, but its enormous scale and innovation-focused pipeline provide it with a significant economic moat.
NYSE: ABT
Key Data Points
Abbott scans as a top dividend play for three key reasons:
- Dividend yield and sustainability: Abbott stock pays an annualized yield of 2.12%, which is significantly higher than the average of 1.35% among S&P 500 listed stocks. It also has a trailing-12-month payout ratio of 64.8%, indicating that its cash distributions are well covered by earnings.
- Consecutive dividends: Abbott has declared 399 consecutive quarterly dividends since 1924, making it a reliable choice for income-seeking investors. Additionally, the company has increased its dividend payout for 51 consecutive years, showcasing management's commitment to paying a top-tier dividend.
- Blistering dividend growth: Over the past five years, Abbott has boosted the size of its dividend checks by approximately 11.4% per year. Within its large-cap peer group of companies with no less than 15 years of consecutive raises, the average annual dividend increase stands at only 6%.
All told, Abbott has a proven track record as an elite dividend stock that investors can count on across economic cycles. This feature makes this blue chip medtech stock a worthwhile addition to almost any type of portfolio.
Medtronic: A dividend check you can count on
Medtronic, a global medical device company, has consistently rewarded its shareholders with dividends. Speaking to this point, the company has increased its dividend for the past 46 consecutive years. This remarkable streak underscores the company's commitment to creating value for shareholders.
NYSE: MDT
Key Data Points
Medtronic stock pays a sizable yield of 3.27% on an annualized basis. However, the medical device titan's payout ratio is 87.2%, meaning that future raises to the payout may be constrained by earnings growth.
Indeed, Medtronic's five-year dividend growth rate of about 5% falls below its peer average (see above). The good news is the medtech company's shares are trading in bargain territory at 15.4x forward earnings, and its top-line growth is poised to accelerate in the coming years, thanks to its strong cardiac device pipeline.
Bargain hunters may want to stock up on this blue chip dividend equity before interest rates start moving down. Thanks to its superb track record, this medical device titan is highly likely to garner significant interest from fund managers once the Fed begins to slash rates.
