3 Dividend Stocks to Trade as Interest Rate Cut Looms

Dividend stocks outperform a year after a rate-cutting cycle starts

Dividend stocks may see renewed buying interest if the Federal Reserve slashes interest rates on Wednesday, July 31. Analysts widely expect the central bank to cut the fed funds target rate by 25 basis points at the conclusion of its two-day FOMC meeting to offset the impact of the ongoing trade war between Washington and Beijing and a slowing global economy.

Typically, stocks that pay enticing dividend yields become more attractive when interest rates fall because they offer superior returns to competing fixed-income assets such as bonds, Treasury notes, and certificates of deposit (CDs). Over the past 40 years, S&P 500 dividend-paying stocks have outperformed non-paying dividend stocks by an average of 5% one year after the first Fed rate cut in each cycle, according to Ned Davis Research, per Barron's.

Below, we look at three stocks that have recently increased their quarterly dividend and offer a yield that outperforms the 1.9% S&P 500 average. As well as looking at names in low-interest-rate-friendly sectors, such as utilities and consumer staples, we look at a stock in the financial sector that should continue to grow earnings despite an easing Fed.

Kellogg Company (K)

Kellogg Company (K) manufactures and markets a variety of cereals and convenience foods. The maker of Special K, Frosted Flakes, Froot Loops, Rice Krispies, and Pop-Tarts has increased its third-quarter (Q3) dividend to 57 cents per share, representing a 2% increase. The 113-year-old company offers an annualized dividend yield of 3.81%. From a valuation perspective, Kellogg stock trades at 15.31 times forward earnings, below its five-year average of 17.5 times. As part of a restructuring move, the cereal maker announced in April that it plans to sell some of its snack businesses, including Keebler cookies, in a transaction valued at $1.3 billion. Trading at $58.42 with a market capitalization of $19.89 billion, the stock is up 4.44% year to date (YTD), underperforming the industry average by 8.07% as of July 30, 2019.

Kellogg shares appear to be forming a possible double bottom, although the pattern remains unconfirmed until the price trades above the formation’s neckline at $60. More recently, the stock broke above a downtrend line stretching back to September 2018 as well as the 200-day simple moving average (SMA). Traders who buy here should place a stop-loss order just below the downtrend line, which now acts as support, and aim to book profits on a move to crucial overhead resistance at $65.60.

Chart depicting the share price of Kellogg Company (K)

Wells Fargo & Company (WFC)

With a $213.38 billion market cap, Wells Fargo & Company (WFC) provides retail, commercial, and corporate banking services to individuals and institutions through its community banking, wholesale banking, and wealth management segments. The banking giant expects to raise its Q3 dividend to 51 cents per share from 45 cents per share – a 13.33% increase, subject to approval by the company's board of directors. Furthermore, the company recently announced that it plans to buy back up to $24.5 billion of its stock.

Financial companies are "buying a great deal of stock back at 11 times earnings, which is very accretive to their earnings," said David Katz, chief investment officer at Matrix Asset Advisors, per the same Barron’s article previously referenced. "They are going to continue to grow earnings, even in a low interest rate environment," he added. As of July 30, 2019, Well Fargo shares issue an enticing 4.14% dividend yield and have gained 6.73% on the year.

Wells Fargo shares have remained stuck in a steady downtrend for the past 12 months. Last week, the price rallied above a 12-month trendline and the 200-day SMA – a move that may trigger further buying in coming days. The moving average convergence divergence (MACD) line also suggests the emergence of a new uptrend with a recent cross above the signal line. Those who take a long position should target a move to $54, where the price encounters resistance from a two-year horizontal line. Protect downside risk with a stop sitting just below the 50-day SMA.

Chart depicting the share price of Wells Fargo & Company (WFC)

Avista Corporation (AVA)

Spokane, Washington-based Avista Corporation (AVA) operates as an electric and natural gas utility company through two divisions, Avista Utilities and AEL&P. The utility provider's primary markets, which include Washington State, Idaho, and Montana, continue to experience strong population growth. Earlier this year, the company increased its quarterly dividend by 4% to 38.75 cents. This represents a $1.55 annualized dividend and a yield of 3.39%. It marks the seventeenth consecutive year that the board has raised the dividend. As of July 30, 2019, Avista stock trades at about 23 times forward earnings, has a market cap of $3 billion, and is up 9.36% YTD.

Avista's share price plunged 13% on Dec. 6, 2018, after a potential acquisition by Canada's Hydro One Limited (HRNNF) fell through. The stock continued lower for about a month before finally printing a YTD low at $40.05 on Jan. 24. Since then, the price has broken above a cup and handle pattern to test significant resistance at $46. Over the past two weeks, a tight pennant pattern has formed, suggesting upside continuation. Those who take a trade should set a stop just below an area of vital support at $45 and look for price to close the gap at $50.44. Manage risk by moving the stop to the breakeven point if the stock climbs above the July 2018 swing low at $48.

Chart depicting the share price of Avista Corporation (AVA)
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