Taper Tantrum Dividend Plays
Contrarian Outlook | Oct 13, 2021 05:15AM ET
If I were a Federal Reserve official—and I were not currently under investigation for sketchy February 2020 trades—I’d really be tempted to “back up the truck” on key taper tantrum dividend stocks.
These obvious payout plays have already soared 56% or more year-to-date. But there’s more to come because their profits are being artificially suppressed by the Fed. (Yes, you read that right. The Fed money flood is boosting everything except for these laggards. For now.) Once this constraint is lifted—or even moderated a bit—their bottom lines are going to boom.
Today, the Fed is buying $80 billion in government bonds every month. Yes, Chairman Jay Powell wants to kick this addiction, but thus far he can only bring himself to “think about it.”
Eventually, he will try to cut back on this bad habit. This opens the door for us laypeople to profit.
Treasury yields are based on supply and demand. Supply (bond issuance) is huge, but so is demand, with the Fed stepping in for $80 billion per month. When this big buyer cuts back, we’re likely to see the yield on the 10-year note rise to attract other buyers.
This is already happening. When we chatted at the beginning of 2021, the 10-year note paid just 1%. It has since soared to 1.6%, which may not sound like much but is a 60% increase.
As the 10-year yield has risen, so have bank profits. Small banks were my favorite dividend ideas for 2021 for this reason. They directly benefit from higher rates because their lending profits pop.
Synovus Financial (NYSE:SNV) has gained 30% since our January conversation. Not bad for a safe dividend stock! Comerica (NYSE:CMA) has done even better, returning 56% (including dividends) since our Contrarian Income Report service’s official recommendation earlier this year.
Value-minded investors (shout out to the few of you remaining!) may worry that gains like these are nice but unlikely to be repeated. To the contrary, there are two compelling reasons why dividend-paying small bank stocks may still be wildly undervalued.
First, the 10-year rate would likely be trading between 2% and 3% if the Fed weren’t buying bonds. It’s already back up to 1.6% and the taper hasn’t even begun yet! When it does, the benchmark rate will likely challenge 2%+ in 2022. This will be another boon to bank profits.
Second, select bank stocks already have more cash than they know what to do with. This may sound crazy given that their profits have been artificially depressed, but their flush capital ratios say otherwise.
For example, Puerto Rico-based First BanCorp (NYSE:FBP) boasts capital ratios about as high as we ever see (Common Equity Tier 1 is a rock solid 17.3%, where the requirement is just 7%), so FBP is hiking its payout and buying back shares!
Get The News You Want
Its recent dividend raise of 40% (no typo!) has kickstarted its meandering stock higher. And with more than enough cash to return to shareholders, FBP also bought back 5% of its float (and plans more).
h2 FBP’s Dividend Magnet is DueOpportunistic repurchase programs like FBP’s are the gifts that keep giving. Fewer shares make everything—including an already hot dividend—look better on a “per share” basis.
CMA still boasts a favorable dividend magnet setup, too. Sure, the stock has been strong in 2021, but it is only now starting to “catch up” with a payout that has nearly tripled over the last five years:
h2 CMA’s Magnet Finally Starts to Pull, TooOverdue dividend magnets combined with higher taper-driven profits should send these stocks soaring quite soon.
These are the types of “recession-proof” retirement plays that I specialize in. I hate losing money, so I look for dividend stocks that have the wind at their backs. Whether it’s a bull or bear market, I don’t really care, because my downside is that these stocks pay their dividends and “only” gain 15% per year.
On the upside, they could gain 56% like CMA did in just ten months.
I call these “Hidden Yield Stocks” because they seem boring to the uninformed investor. That is ideal for me because safe stocks that double our money are anything but boring!
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.