After months of waiting on the edge of their seats, Wall Street analysts and investors appear mildly disappointed that the Federal Reserve chose not to raise the federal funds target rate last week. The federal funds target is what ultimately helps guide the interest rate we pay for everything from a mortgage to a credit card.
However, the Fed did signal that at some point in the near future it sees the federal funds target rising. The prospect of higher interest rates is a welcome sign for financial service companies, which are expected to reap more in interest-based income.
But, on the other side of the coin, a rise in interest rates can make dividend stocks appear less enticing. As perceived to be "safer" investments like bank CDs and bond yields rise in accord with the federal funds target, some investors may choose to sell out of their dividend stocks in order to take advantage of this safety. It also doesn't help that the stock market is experiencing its first correction in four years, further enhancing investors' sense of fear.
High-yield dividend stocks you can trust
Personally, I'm of the opinion that selling out of dividend stocks is doomed to be an unsuccessful long-term strategy since dividend stocks historically outperform non-dividend-paying companies. Trying to time when to jump in and out of dividend stocks will likely return no better odds than randomly flipping a coin. Instead, I'd suggest that an investor's best course of action would be to locate high-quality, high-yield dividend stocks and stick with them over the long run.
Today, we'll briefly look at a handful of high-yield dividend stocks that I believe investors can trust. As always, consider this a jumping-off point for your own research instead of as a concrete signal to buy since stocks can move lower just as easily as they can move higher.
AT&T (T 0.16%)
There's something to be said about a "boring" business model: They're highly profitable. AT&T certainly isn't going to offer rapid growth with it and rival Verizon blanketing the U.S. market with wireless and broadband content. However, that doesn't mean it's out of tricks to boost its top and bottom lines.
To begin with, the barrier to entry in providing content is incredibly high. Given the high costs associated with rolling out the needed infrastructure for wireless and broadband services, AT&T is practically assured of only having a select few major competitors. With few content providers available to homeowners and wireless customers, it means AT&T's pricing power remains strong.
AT&T is also the nation's top wireless carrier when it comes to brand loyalty based on the latest Brand Keys survey. If consumers believe that AT&T offers the most reliable network or have the greatest engagement with the storied AT&T brand, then they're less likely to leave the company for a rival.
Another point worth mentioning is the insatiable desire of Americans to indulge in new technology. I, for one, look forward to regularly upgrading my smartphone every year or two. As consumers, too, look to upgrade their content devices, their desire for content will likely grow. This should allow AT&T to reap substantial long-term rewards in terms of selling high-margin data plans.
Between AT&T's respected brand and its 5.8% dividend yield, I'd opine it's a high-yield dividend you can trust.
Alliance Resource Partners (ARLP 0.14%)
I know what you're thinking, and no, I wouldn't normally think of a coal stock as being reliable over the long term either considering what the sector has gone through in recent years. But master limited partnership Alliance Resource Partners isn't your typical coal company.
Perhaps the biggest difference between Alliance Resource Partners and the traditional coal industry can be found with its cost structure and balance sheet. A majority of struggling coal producers are toting around billions in debt -- but not Alliance Resource Partners. It currently claims $873 million in debt and generated $699 million in operating cash flow over the trailing-12-month period. Its markedly lower debt levels gives it flexibility that its peers simply do not have. It also maintains one of the lowest cost operations in the coal mining industry, which when combined with lower debt interest payments helps boost its income.
Another aspect of Alliance Resource's business model investors are sure to appreciate is its ability to reduce its exposure to the wholesale coal market. Alliance Resource Partners focuses its efforts on locking in production for a year to three years in advance. With little wholesale exposure, it means Alliance Resource's cash flow is highly predictable.
Currently yielding a robust 11% and valued at less than eight times Wall Street's profit projections for 2015, I'd suggest Alliance Resource Partners isn't getting credit where it's due.
Annaly Capital Management (NLY 0.43%)
If you're looking for a high-yield dividend stock to trust for income generation over the long run that's been absolutely clobbered in recent years, then I'd point you in the direction of mortgage real estate investment trust, or mREIT, Annaly Capital Management.
Mortgage REITs tend to be at their best when interest rates are falling or at their lows since it widens their net interest margin, allowing them to borrow at low rates and re-lend at higher rates. When rates are rising or expected to rise, the opposite can be true. Net interest margins can tighten and mREITs like Annaly can find it tougher to turn a substantive profit.
However, it's my contention that Wall Street may have overpriced the negative effects of interest rate increases into Annaly's valuation. Even with an expected reduction in its portfolio value, Annaly is still trading well below its book value. Additionally, the Fed seems content with raising rates at a very slow pace, ultimately targeting a 2% federal funds level. This would be lower than the Fed has targeted during the previous decade, and it would imply that Annaly will have some versatility when it comes to positioning its mortgage-backed securities portfolio for success. Furthermore, historically Annaly's dividend over the past 15 years has averaged around 10%, through the good and bad times. That's a yield that I'd go out on a limb and state that income investors would gladly accept.
Annaly is currently yielding close to 12%. And while I do expect its payout to drop a bit as rates begin to rise, there's no reason to believe it won't retain a markedly superior yield to the vast majority of S&P 500 companies.