5 Best Bargains for Dividend Investors (including Retirees)

What do tax reform, rising interest rates and market volatility have in common? They’re all reasons to take a fresh look at dividend stocks.

The new tax law should benefit dividend investors, money managers say, as a lower corporate tax rate boosts profitability and spurs companies to return more cash to shareholders. Recent market swings are another argument for dividend stocks: Historically, stocks paying generous dividends have outperformed non-dividend payers, with less volatility.

Rising rates, however, are often considered a strike against dividend stocks—why would you take the risk of investing in stocks when you can get decent yields in bonds? But historically, dividend payers have significantly outperformed non-dividend payers in the years after the Federal Reserve initiates a rate-hiking cycle, says John Buckingham, chief investment officer at AFAM Capital, in Aliso Viejo, Cal.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Though rates have started to rise, they remain relatively low, and dividend income “is still very attractive relative to other investment choices,” Buckingham says. The yield on the 10-year U.S. Treasury hit 3% in late April, the first time it's been that high in about four years, while many dividend stocks offer similar or higher yields along with potential price appreciation and dividend growth.

That said, some dividend payers have become overvalued as income-hungry investors snapped up traditional bond substitutes, such as utility stocks, during the long stretch of low rates. Here’s where some value-minded money managers and analysts are finding the best bargains today.

Where to Look for Good Dividend Stocks

Banks tend to be beneficiaries of rising interest rates, as they profit from a widening gap between the rates they charge borrowers and the yield they pay depositors. Jeff John and Miles Lewis, co-managers of the American Century Small Cap Value Fund, like First Hawaiian (FHB), which has strong market share in the Aloha state. The bank has a solid balance sheet and room to boost its dividend 9% or 10% this year, Lewis says.

Lewis and John also like Bemis (BMS), which makes packaging for food and other products. There is stable demand for such packaging, and the company generates a lot of free cash flow and pays a “very safe dividend,” Lewis says. Bemis has paid a dividend since 1922 and has boosted its cash payout for 35 years in a row.

Buckingham is finding some bargains in the technology sector, which has taken some hits this year after a strong 2017. He likes Qualcomm (QCOM), maker of wireless communications equipment and developer of the widely used CDMA technology, which allows mobile devices to send and receive data and voice signals. The company recently raised its quarterly cash dividend about 9%, to 62 cents per share.

IBM (IBM), the information-technology giant, is another Buckingham favorite. Big Blue stock was left out of last year’s tech-sector surge as investors questioned its growth potential. But the company is focused on expanding its “Strategic Imperatives,” including mobile, cloud and security technologies, and the growth in those areas is starting to outweigh the stagnation in other businesses, analysts say.

Even the utilities sector, widely seen as overvalued, holds some bargains for choosy dividend investors, says Travis Miller, equity strategist at investment-research firm Morningstar. Among Morningstar’s favorites is Dominion Energy (D), one of the largest energy producers and transporters in the U.S. Dominion is a partner in the Atlantic Coast Pipeline, which will transport natural gas from West Virginia to Virginia and North Carolina utilities. Over the next decade, Miller says, Dominion will be “a big winner from the U.S. energy shift toward gas and renewable energy and away from coal.”