Rate Hikes and Dividends

11/08/2016 7:00 am EST

Focus: STOCKS

John Dobosz

Editor, Forbes Premium Income Report and Forbes Dividend Investor

Dividend-paying stocks have been among the market’s best performers, but many investors worry about what will happen to these stocks once the Fed begins to hike rates in a meaningful way, asserts John Dobosz, editor of Forbes Dividend Investor.

The good news is that higher rates are not a death sentence for dividend stocks. We saw this from July 2012 through December 2014 when the yield on the 10-year U.S. Treasury note more than doubled from 1.4% to 3.0%.

During this 17-month period, dozens of stocks recommended in the Forbes Dividend Investor newsletter produced total returns of 20% and higher.

Below, you will find two dividend-paying stocks — both in the retail sector — that are currently among the highest ranked by the value-based model I created to identify attractive stocks.

In addition, these stocks also proved their mettle, withstanding the impact of higher rates during the 2012-2013 period, and during the ‘taper tantrum’ period from May through December of 2013.

Kohl’s (KSS) operates almost 1,150 department stores, selling moderately priced apparel, accessories, and home goods.

Like most retail stocks, Kohl's has taken its lumps, with shares falling as much as 30% earlier in the year due to disappointing results at the stores.

Kohl's turned the tide this summer, reporting second-quarter financial results that topped analysts' expectations, sending the stock more than 15% higher on the day.

Kohl's is a stock that I have in my Forbes Dividend Investor Top 25 model portfolio. It trades at substantial discounts to historical valuations, including a 33% discount to its five-year average price-sales ratio.

With a payout of $2.00 per year, Kohl’s also boasts a reliable and rapidly-rising dividend, good for a yield of 4.6% at current prices.

Since initiating the dividend at $0.25 per quarter in 2011, Kohl's has doubled the payout to its current quarterly rate of $0.50 per share.

Nordstrom (JWN) is a retailer of luxury apparel, shoes, cosmetics, and accessories, operating 326 stores.

Revenue has grown 8.3% annually over the past five years, but forecast to slow to a 2.6% rate this year. That has been a drag on the stock price.

Shares got down to $36 in May 2016, and again in June, but rebounded more than 50% from those lows.

Now still looks like a good time to get into Nordstrom if it is able to earn price multiples more in line with historical averages.

The stock still looks cheap on just about any measure, trading at substantial discounts to historical valuations on multiple metrics.

Nordstrom is also a prolific dividend payer, boosting the payout by 16.5% a year over the past decade to its current rate of $1.48 per year.

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By John Dobosz, Editor of Forbes Dividend Investor

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