After hitting record highs in the middle of the pandemic, stock indexes are suddenly falling into the red.
That makes this the perfect time to shift some money out of more speculative assets into more durable high-dividend stocks that can pay you cash for owning them. That’s a tried and true strategy for fighting the uncertainty in markets.
You see, investors are anxious that the high price of stocks coupled with an economy still hobbled by COVID-19 is a recipe for high volatility or even a sustained downturn.
In fact, we’re already seeing some evidence of that.
As investors continue to anticipate a faster pace of vaccination, allowing the economy to run on all cylinders, bond prices are falling. The resulting rise in long-term interest rates has spooked some sectors of the markets.
Tech stocks, in particular, have seen selling as low long-term interest rates have been one of the justifications for high valuation levels. The Nasdaq is down about 5% from its peak two weeks ago, while some stocks like Apple Inc. (NASDAQ: AAPL) are firmly in correction territory.
While volatility takes a toll on tech shares, it’s creating an opportunity in dividend stocks…
Why Dividend Stocks Are in Play Now
Normally when markets get choppy, investors can flee to safe havens. But with interest rates at historic lows, there aren’t many to choose from.
Even as long–term rates ticked slightly higher, U.S. Federal Reserve Chair Jerome Powell has been quick to tell investors not to expect the Fed to raise short-term rates anytime soon. Speaking to the Senate Banking Committee on Tuesday, he said that the U.S. economy is a long way from full employment and the Fed’s inflation goals.
That means the Fed will continue to support the economy with low interest rates and asset purchases.
With interest rates held down by the Fed for the foreseeable future, this opens up a tremendous opportunity for income-starved investors.
The widening gap between short-term and long-term rates is fantastic news for the banking industry. Banks’ primary source of profit is the difference between what they pay on deposits and what they charge for loans. With short rates controlled by the Fed and the long rates by the market, that spread is getting wider.
Investors can buy higher-yielding banks with reasonable expectations of higher profits and dividend increases in the future.
That’s the perfect remedy to today’s topsy–turvy markets and uncertainty.
Here are the best dividend stocks to add now…
This Income Stock Pays 5.43%
New York Community Bancorp. (NYSE: NYCB) has suffered because of investors’ perceptions that New York would turn into a ghost town. While the pandemic has indeed changed New York and other large cities, investors are overlooking two critical facts about New York Community Bancorp.
First, New York is still there. It is not what it was five years ago, but it is still one of the largest, most vibrant cities in the world. Midtown will open back up again sometime in 2021, and the city will begin a long period of recovery.
Second, New York Community Bancorp. is a ridiculously skilled and cautious lender. Real estate prices in the city would have to fall by 50% before they ever had to lose any sleep about severe losses of the bank’s capital.
New York Community also has done an outstanding job of sizing up its borrowers. The people it has lent money to are paying it back on time, even during the pandemic. The bank’s non-performing assets ratio is one of the lowest in the industry at just 0.04% of total assets.
The shares currently yield 5.43%. It is ridiculous that this safe, well-run bank pays a dividend rate higher than the yield on junk bonds, but that is precisely the situation with New York Community Bancorp.
The Best Dividend Stock for the Housing Boom
TFS Financial Corp. (NASDAQ: TFSL) is a Cleveland-based bank that has been around since 1938. The bank focuses on single-family home mortgages, and it has been a major beneficiary of the home buying boom we saw in 2020.
TFS Financial originated more loans in the fourth quarter of 2020 than any other quarter in the bank’s history. First mortgage originations grew from $1.8 billion in 2019 to more than $3 billion in 2020, with excellent credit quality.
TFS Financial is also good at underwriting loans. Its average mortgage borrowers’ loans have an average credit score of 759. The average loan-to-value ratio of the underlying properties was just 68%.
TFS Financial also has a very low level of non-performing assets. Right now, just 0.35% of the bank’s total $14.5 billion of assets are classified as non-performing.
Shares of TFS Financial also yield more than most income alternatives, with a payout of 5.5%.
The Best Dividend Stock Today
Located in Northwestern Ohio, Northwest Bancshares Inc. (NASDAQ: NWBI) has been in business since 1896.
The bank has been through world wars, depressions, recessions, and yes, even several pandemics. This bank took 2020 in stride.
In the fourth quarter of the year, the bank grew earnings year over year by about 37%. That’s pretty impressive given that in 2019 no one here in the United States could even imagine a global pandemic shutting down a huge part of the economy.
Results for Northwestern Bancshares are so strong that in addition to paying a generous quarterly dividend for the 105th consecutive quarter, the bank also bought back approximately 760,000 shares in the fourth quarter at an average price of $12.20.
At the current price, the shares yield 5.3%.
Thanks to the combination of the Fed’s willingness to hold short-term rates and the market’s growing perception of economic improvement in the second half of 2020, banks will see skyrocketing profits in 2021.
With uncertainty roiling markets, it’s the perfect time to get into high-dividend paying stocks like these.
— Money Morning Staff