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The Federal Reserve has all but hiked interest rates. It’s expected to become official following Wednesday’s Fed meeting. There has been a lot of debate over whether the Fed should or should not raise rates, but after nine years without an increase, the time is now.
The big banks will benefit nicely, and even insurance companies will get a boost. However, there’s a better way to prepare your portfolio for higher rates.
Goldman Sachs (NYSE: GS) has an interesting notion: Focus on high-quality businesses with strong balance sheets and avoid the ones with high amounts of floating-rate debt.
The idea is that companies with indebted balance sheets and low-margin businesses will be more at risk when the credit markets are harder to tap into.
There are a number of names on Goldman’s list, so it would be hard to own them all. Not all of them pay dividends, however, and some are well-known companies that most people already own, such as Apple (NASDAQ: AAPL). So I’ve combed through the list to find the top dividend stocks to own for the rate increase.
No. 1 Dividend Stock for the Fed Hike: TJX Companies (NYSE: TJX)
TJX Companies runs the T.J. Maxx, Marshalls and HomeGoods store brands, among others. TJX has for years been one of the best retailers around. It’s offering a 1.2% dividend yield.
Part of what makes TJX great – like the other names on this list – is its strong balance sheet. Its long-term debt-to-equity ratio is under 40% and it’s paying out just 25% of its earnings via dividends. It has upped its dividend for 18 consecutive years.
Part of TJX’s resilience comes from its business model, which provides a “treasure hunt” experience for shoppers via its off-price retailing model. TJX also has a proven record of success in both strong and weak economic environments.
TJX’s third-quarter earnings beat expectations, with comparable-store sales up 5%, besting the 2% growth from a year earlier. It marked the 27th consecutive quarter of comparable-store sales growth.
No. 2 Dividend Stock for the Fed Hike: CH Robinson Worldwide (NASDAQ: CHRW)
CH Robinson is a key player in the freight brokerage market in the U.S., with a large network connecting carriers and shippers. It’s a third-party logistics company which provides freight transportation services and logistics to various companies. At 2.8%, CH Robinson offers the highest dividend yield on our list.
CH Robinson has a 44% long-term debt-to-equity ratio. It’s paying out less than half its earnings as dividends. Plus, it’s upped its dividend for eight straight years.
The company has a strong history of cash flow over the years, thanks to its pricing power and non-asset operating model. That means it’s not a capital intensive company and doesn’t own any transportation equipment, allowing it to generate outsized returns on capital.
No. 3 Dividend Stock for the Fed Hike: Oracle (NASDAQ: ORCL)
Oracle is a manufacturer of application software and cloud infrastructure. It’s a major player in the enterprise information technology market with a large client base.
The company just recently decided to make an entry into the large, and higher-margin, cloud computing industry. This comes as it rolls out its Elastic Compute Cloud to offer infrastructure as a service (IaaS) and upsell to its already large list of clients.
Oracle is offering a 1.6% dividend yield and is paying out just 24% of its earnings via dividends. Its long-term debt-to-equity ratio is upward of 83%, but the key is that Oracle has $42 billion in debt while it has more than $54 billion in cash.
With a likely Fed interest rate hike looming on Wednesday, the high-yield dividend stocks will feel the most pain. Rather than suffering along with them, look for companies with solid balance sheets and room to grow their dividends.
Click here for more high-quality stocks that have a history of upping their dividends and a proven track record of outperformance in varying interest rate climates.