Income investors will always be in a quandary over whether to purchase fixed income securities such as t-bills and bonds, or to buy stocks with competitive yields. And, indeed, there are a great many factors that should be weighed before making any such decision.
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One of those factors is the prevailing interest rate climate, an influence that will bear strongly on the principal value of any fixed income product - and on preferred shares. When interest rates are rising, the principal value of a bond falls. And while that's fine for those planning to hold their bonds until maturity, for those who want to leave their options open, rising rates could wreak havoc on a portfolio's bottom line.
Only solid-yielding common shares stand to rise in an era of mild inflation or prosperity that is accompanied by rising interest rates.
For those who believe that rates are currently poised to rise, here are three strong, dividend-yielding candidates with great franchises and a strong recent performance for consideration. (Learn about issues that may complicate dividends for investors in our article Dividend Facts You May Not Know.)
Koninklijke Philips Electronics NV (NYSE:PHG) is an Amsterdam-based conglomerate better known to Americans as Philips Electronics. With three principal areas of operation, including healthcare, lighting and consumer lifestyle products, the company has developed into one of the oldest and most secure franchises in the world.
Philips has a market cap in excess of $22 billion and pays an annual 3.89% dividend. The shares have appreciated by over 50% in the last six months, yet they still carry very competitive fundamentals. Price-to-book is just 1.15 and price-to-sales a lowly 0.63.
Rated a "Buy"
Portugal Telecom SGPS (NYSE:PT) trades with a P/E of 11.59x last year's earnings and yields a very healthy 7.09%. The shares are up nearly 100% from its 52-week low and have a market capitalization of nearly $9.5 billion.
PT recently received a strong rating from analysts at ING Group who reported that "PT's earnings are strong... it can grow revenue over the medium term." ING concluded by rating Portugal Telecom a "buy".
Nokia (NYSE:NOK) is $55 billion company whose shares are up 75% since hitting 52-week lows in March of this year. The shares yield 3.6% annually and have a P/E of 17.6. Nokia is a manufacturer of mobile communications devices and is an internet service provider.
In a rising interest rate environment that accompanies economic recoveries, stocks generally outperform bonds. Those stocks that pay investors a healthy and safe dividend while they appreciate make for the best of both worlds - income and capital appreciation.
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