3 Unstoppable Buffett Dividend Stocks That Will Survive Fed Rate Hikes


JThe Federal Reserve announced a quarter-point interest rate hike at its first meeting of the year, and the central bank has guided six more rate hikes this year. While the recent rate hike was less than the half-point hike that some investors feared, further increases are expected and rising interest rates have historically created a less favorable backdrop for equity-focused stocks. growth and the market as a whole.

With rate hikes creating potential sources of volatility, now may be the right time to add strong, value-oriented companies to your portfolio – and where better to start than stocks backed by the investing legend in value Warren Buffett and company Berkshire Hathaway? Here’s why a panel of Motley Fool contributors identified Verizon Communications (NYSE:VZ), Bank of America (NYSE: BAC)and United Parcel Service (NYSE: UPS) as top stocks in Berkshire’s portfolio that are poised to thrive despite rate hikes.

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Buy this telecom leader at a better price than Buffett

keith noonan (Verizon): Buffett and Berkshire made a massive purchase of Verizon stock in the fourth quarter of 2020, and the telecommunications giant is now the investment conglomerate’s seventh-largest stock portfolio. The stock has actually lost ground since Berkshire launched its position, meaning investors have the option to buy the stock at even lower prices than Buffett.

Verizon also seems cheaply priced at current prices. The company’s shares are trading at less than 9.5 times this year’s expected earnings and offer a current dividend yield of 5%. Even better, the company has increased its payout every year for 15 consecutive years and is in a good position to continue to increase the amount of cash it returns to shareholders.

The telecommunications industry tends to be extremely capital intensive, so space players tend to have a lot of debt on their books. However, most of Verizon’s debt has been secured at fixed rates and will not be affected by future interest hikes. Additionally, Verizon’s strong business and stellar free cash flow generation has allowed the company to secure loans at rock-bottom rates, and it’s likely to continue to do so.

While interest rate hikes can be expected to abate and lead to increased borrowing expenditures, if and when the company seeks new loans to continue to develop its infrastructure and purchase a band of spectrum for its wireless network, Verizon should have little trouble managing these changes. The company’s shares appear to be trading low at less than 9.5x expected earnings this year, it currently sports a dividend yield of around 5% and the telecom rollout 5G service could dramatically accelerate sales and profit growth.

Lending is about to get a whole lot more profitable

James Brumley (Bank of America): Runaway inflation is never good for the economy, and interest rate hikes designed to curb it also work against it. However, there is one industry that can directly benefit from rising rates: banking. And I suspect Berkshire Hathaway’s $44 billion stake in Bank of America will be one of the biggest beneficiaries of impending rate hikes.

Simply put, profit margins on loans are greater when interest rates are higher than when they are lower. This is because the difference between a bank’s cost of borrowing to borrow the money it lends and the interest rates it charges borrowers widens as rates rise. For perspective, bank profit margins in a low rate environment like the one we are in now are closer to 3%, but move closer to 4% (or more) when rates are higher. We are somewhere between those two numbers now.

This may not seem like a significant difference in absolute terms, but think of it like this: the larger of the two numbers is 33% larger than the smaller, which means that a factor that accounts for a large portion of the results of banks could be on the eve of major growth.

The trick is the rhythm. The Federal Reserve will want to raise rates fast enough to contain inflation, but not so fast that the US and global economy would be shocked into a recession. However, the Fed’s Federal Open Market Committee seems to understand both of these nuances well. Either way, Bank of America looks like a worthwhile long-term buy. And its dividend yield (currently 2%) and payout growth (currently outpacing inflation) should benefit long-term investors.

UPS is an ideal dividend stock

Daniel Foelber (Unified Parcel Service): fedex (NYSE: FDX) the stock fell 4% on Friday after missing earnings and beating earnings when it reported third-quarter fiscal 2022 results after the market closed Thursday. Similarly, UPS stock fell on Friday despite a bullish day in the market.

It’s no secret that UPS is affected by some of the same challenges that FedEx faces. But both companies manage to pass on the higher inflation-related costs to their customers. FedEx and UPS raised prices at the start of the year. According to FedEx’s results, customers seem willing to accept these higher prices so far.

During Thursday’s earnings call, FedEx announced it was implementing fuel surcharges beginning April 4 for FedEx Express, Ground and Freight. I would expect UPS to announce similar charges in the coming weeks, or when it reports revenue in about six weeks.

FedEx noted, however, that rising labor costs and headwinds related to COVID-19 dampened its operating margin for the quarter, which came in at 6.2% adjusted. Despite FedEx’s focus on expanding margins, UPS consistently delivers much higher operating margins to FedEx.

FDX Operating Margin Chart (Quarterly)

FDX operating margin (quarterly) given by Y-Charts.

UPS is an efficient company that generates tons of free cash flow well beyond a dividend. It’s exactly the kind of trait that Buffett tends to look for in a long-term holding. UPS recently increased its dividend by 49%, giving it a current dividend yield of 3% versus 1.4% for FedEx. UPS is a more expensive stock than FedEx when it comes to traditional valuation metrics such as price-to-earnings (P/E) ratio. But UPS has better management, has a better track record of meeting and exceeding its goals, has been more successful in e-commerce than FedEx, and is a better run company than FedEx. And for these reasons, UPS is a great package delivery service. dividend stocks to own for decades to come.

10 stocks we like better than Verizon Communications
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in the stocks mentioned. James Brumley has no position in the stocks mentioned. keith noonan has no position in the stocks mentioned.

The Motley Fool owns and recommends Berkshire Hathaway (B shares) and FedEx. The Motley Fool recommends Verizon Communications and recommends the following options: January 2023 $200 Long Calls on Berkshire Hathaway (B Shares), January 2023 $200 Short Calls on Berkshire Hathaway (B Shares), and 265 Short Calls $ in January 2023 on Berkshire Hathaway (B shares). ). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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