Income investors should embrace higher yields while interest rates remain at (hopefully) their peak. With one Fed rate cut likely in the cards later this year, we’ve pretty much seen a “reset” of expectations of sorts. Indeed, we can live with another few months of elevated rates, with one cut by the year’s close. There’s really no problem with that, especially for investors focused on the long term.
Once rates do start falling, low-cost dividend stocks may also stand to yield less over time. The same goes for risk-free assets. For long-term investors with overweight risk-free assets, this could mean a reduction in passive income coming over the next few years should rates really start coming down.
There is a way around falling rates, though. Today’s dividend stocks are fine buys, and they may offer more than just quarterly income payouts; they may just have enough wiggle room to reward investors with slightly fatter dividend raises as their businesses start anticipating the benefits that come with lower interest rates.
Here are three such names I’d be tempted to act on today:
Verizon (VZ)
Verizon (NYSE:VZ) is shaping up to be an intriguing deep-value option now that VZ stock has shown it can hang onto gains, at least for a few quarters. With shares of the $167.4 billion telecom now up around 27% from its multi-year depths of $31 and change, questions linger as to what the next big move will be as recent momentum stalls out.
I think it could be higher as the firm starts getting more aggressive with growing subscribers and expanding its 5G network. And, of course, lower rates are sure to be a positive for the firm as well as the industry at large. The latest quarter was remarkable strength, with fixed wireless net additions rising 10.2% year over year to 151,000.
My bet is Verizon has more such quarters on the way, and if there are, the more-than-decade-long bottom may very well be in for VZ stock. Further, shares look modestly priced at 14.9 times trailing price-to-earnings (P/E), with a very nice 6.7% dividend yield.
Wendy’s (WEN)
Wendy’s (NASDAQ:WEN) is an iconic fast-food firm with a relatively small market cap of $3.45 billion. The company’s name has been thrown around lately surrounding “dynamic pricing” and various AI initiatives that could help fatten margins via “smart” price discrimentation. Indeed, amid inflation, the last thing consumers want to hear is prices will fluctuate based on circumstances beyond their control.
Wendy’s CFO Gunther Flosch was quick to respond to concerns, noting his firm’s intentions and assuring consumers it will not “get too greedy” on pricing. I’d take Mr. Flosch’s word for it.
If customers feel like they’re getting a bad deal, they’ll simply take their business elsewhere, and Wendy’s is no exception, even though their burgers are right up there. Going into summer 2024, we could see very competitive promos and price cuts from across the board as fast-food chains beckon consumers from their home kitchens.
With a new $3 breakfast combo added to the menu, Wendy’s may just have one of the best deals in the industry. After slumping 30% from all-time highs, WEN stock also looks like a bargain at 17.2 times trailing P/E, with a dividend yield of 6.1%.
Yum! Brands (YUM)
Sticking with the fast-food theme, we have Yum! Brands (NYSE:YUM), the company behind Kentucky Fried Chicken, Taco Bell and Pizza Hut. Like most industry peers, YUM stock has been facing headwinds that have made it difficult to break out. The shares just can’t seem to break past the $143 and change ceiling of resistance. Perhaps a hotter summer for fast-food firms could change that.
There are a lot of good deals and menu innovations on tap this summer. Arguably, Taco Bell has some of the most intriguing new menu items in the industry. With a collaboration with Cheez-It (a tasty, cheesy brand of snacking crackers) bringing two intriguing and limited items to the menu, I find it’ll be tough for consumers to resist trying the product just once, even if it’s not met with rave reviews.
Sometimes, innovation is enough to get people talking again, enough so to drive store traffic.
At 24.4 times trailing P/E, with a bite-sized 1.95% yield, YUM stock should be on the menu if you seek strong brands and a good mix of income and upside potential.
On the date of publication, Joey Frenette did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
