Most people have not—and likely will not—realize one of the biggest side effects of the potential interest rate cuts being proposed by the Federal Reserve (the Fed). A cut in interest rates could help stimulate consumer activity, as U.S. consumer sentiment recently reached a 2021 high. However, it can also hurt those who choose not to consume.
The average savings yield has lowered for the first time since 2021. As bank stocks, particularly commercial ones like Bank of America Co. NYSE: BAC and Citigroup Inc. NYSE: C, get ready for the increasing chance of lower rates ahead, yields on savings accounts have begun to reflect this expectation.
Now more than ever, average portfolios could use a bump in their dividend income components. For this reason, stocks like Medical Properties Trust Inc. NYSE: MPW, NextEra Energy Partners NYSE: NEP, and even Whirlpool Co. NYSE: WHR may come to be the top picks for those who are already seeing warnings in their mail from their banks.
Are Dividends Safe to Start With?
The main risk of buying dividend stocks comes from the dividends themselves. Some companies may artificially (through creative accounting) make it look like the dividends are as safe as can be when, in reality, they are hanging by a thread.
Investors can understand this reality with enough common sense, starting with something as simple as analyzing the industries behind each stock. If the underlying industry is facing potential slowdowns or there is a specific problem at the company, then dividends sort of defeat the purpose.
Payments Are Likely to Keep Coming for Medical Properties Trust
Operating in the medical sector, Medical Properties Trust is part of a real estate investment trust (REIT) network. These structures are required, by law, to pay investors up to 90% of all rental income collected on the properties held, passing the first safety check.
Whether the economy is booming or busting, the healthcare sector will always be there to pump out profits. This fundamental reality made Wall Street analysts assign a consensus price target of $5.6 a share, calling for up to 37% upside from where the stock trades today.
Over the past quarter, real estate stocks in the Vanguard Real Estate ETF NYSEARCA: VNQ underperformed both the Healthcare Select Sector SPDR Fund NYSEARCA: XLV and the broader S&P 500 by as much as 13%.
Because this REIT is exposed to both the real estate and healthcare sectors, it gives investors a potentially double opportunity to catch up to the overall market’s return.
Medical Properties Trust trades at only 38% of its 52-week high, and its valuations are ridiculous. On a price-to-book (P/B) basis, the stock’s 0.3x valuation reflects an 87% discount to the REIT industry’s 2.3x valuation.
At these valuations, and counting with both real estate and healthcare stability, the stock’s 14.7% dividend yield becomes an unmissable consideration for investors of all kinds.
NextEra’s Clean Energy for Rising Oil
Oil prices broke to $90 a barrel last week, a level not seen since October 2023. Analysts at The Goldman Sachs Group Inc. NYSE: GS think that prices could go as high as $100 a barrel this year, and tightening supply could make this a reality.
More expensive oil always makes investors look for alternative energy sources, often found in the classic renewable places like wind and solar. With oil rising and savings yields dwindling, more money could be after NextEra’s proposal.
Paying a 12% dividend is only the start because this stock calls for up to 58% upside from where it trades today. Wall Street analysts think this one could go as high as $46.4 a share, and at 46% of its 52-week high, the dip becomes irresistible for others.
Those at Goldman Sachs saw it fit to boost their position in the stock by 61.1% in the past quarter. Considering Goldman’s net position of $13.3 million, this boost shows a net purchase of roughly $8.1 million.
Spread against the energy sector, NextEra’s P/B valuation of only 0.2x shows a discount of 94% to the industry’s 3.6x valuation today.
Whirlpool’s Construction Front
With Warren Buffett betting on construction stocks like D.R. Horton Inc. NYSE: DHI and others, the expectations for a construction boom are set.
U.S. building permits started to rise again, and with the prospect of lower rates making mortgages more affordable, a bunch of new homes could be hitting the market in the next quarter.
Every home typically comes with essential appliances, most of which are provided by Whirlpool and similar names. This is why the Vanguard Group chose to be the largest shareholder in the stock, controlling nearly 12% of the company.
Based on these real estate trends, management feels comfortable paying investors a 6% annual dividend yield, adding Whirlpool to the list of stocks that beat inflation and government bonds.
Analysts at Loop Capital think the stock could go as high as $140 a share, an objective for almost 21% upside from today’s price.
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