War, Inflation, Higher Interest Rates Fail To Derail Dividend Stocks

Neither war nor higher interest rates, nor raging inflation, could seem to send stocks lower this past week. Despite a 10% increase in crude oil prices and 10-year Treasury yields jumping back above 2.5% for the first time in three years, U.S. stocks enjoyed a mostly positive week. The S&P 500 Index has rallied 10.2% from an intraday low one month ago, and the Nasdaq 100 is up 13.2% from its low two weeks ago. Small cap stocks did not participate in this week’s rally, and the Russell 2000 Small Cap Index is now down 4% over the past 12 months, compared to a gain of 17.7% for the large-cap S&P 500.

The market’s recent rebound happens even as Federal Reserve governors and Chairman Jerome Powell talk about the need for bigger and more frequent rate hikes to fight inflation. Economists now see the federal funds rate rising from its current 0.25% level to 3.25% by next March. Although “don’t fight the Fed” is a time-honored Wall Street maxim, the market may reflect confidence that the central bank is serious about taking steps to achieve price stability. Russia’s failure to execute a swift takeover of Ukraine might also be resposible for what is at least a transitory burst of bullishness.

The Energy Select Sector SPDR (XLE +7.6%) was the week’s top performing sector ETF, and is now up 43.2% year-to-date. Persistent commodity price inflation pushed the materials sector higher by 4%, and utilities surged 3.5% into positive territory for the year, even as interest rates took flight. Long-term bonds took another bruising with the iShares 20+ Year Treasury Bond (TNT -3.6%) tumbling 13% in 2022.

Equity Income Universe: Double-digit percentage gains for crude oil bubbled over into a big week for master limited partnerships in the Alerian MLP (AMLP +6.5%) ETF.

High-dividend funds have been among the top performers this year. The SPDR S&P 500 High Dividend (SPYD +3.4%) and SPDR S&P 500 High Dividend Low Volatility (SPHD + 3.4%) ETFs were big gainers, along with WisdomTree High Dividend (DHS +2.7%) and PowerShares High Yield Dividend Achievers (PEY +2.5%).

To view the complete 27-stock Forbes Dividend Investor portfolio, click here to begin your 90-day risk-free subscription to Forbes Divdend Investor and/or Forbes Premium Income Report, both of which are written and edited by John Dobosz, the author of this article.

International dividend funds like PowerShares International Dividend Achievers (PID +1.5%) and SPDR S&P Global Dividend (WDIV +0.8%) moved deeper into positive territory for the year.

FDI Portfolio Action: Last Friday’s Forbes Dividend Investor portfolio of 28 stocks gained 1.54% this week. Strength in energy and international stocks helped our top two weekly performers: energy transportation outfit Kinder Morgan (KMI +9.6%) and Chilean Coca-Cola bottler Embotelladora Andina S.A. (AKO.B +8.2%). Energy master limited partnership Holly Energy Partners, L.P. (HEP +7.5%) outperformed the AMLP, and our new addition from two weeks ago, plastics maker LyondellBasell Industries NV (LYB +5.1%), also delivered standout performance.

The week’s worst performer was Denver-based home builder M.D.C. Holdings (MDC -10.3%), which hit the skids after the National Association of Realtors reported on Friday that pending home sales in February unexpectedly fell 4.1%, the fourth straight year-over-year decline in monthly real estate transactions. Affordability and slim inventory levels are fueling the decline, and the spike higher in interest rates will add pressure. The average U.S. 30-year mortgage rate finished Friday at a three-year high of 4.56%, up from 2.88% six months ago.

Deletion: Shares of home builder M.D.C. Holdings were thrashed this past week, along with the rest of the builders. The stock has violated a 10% trailing stop and is removed from this week’s portfolio.

Additions: None.

Current FDI Portfolio: The stocks listed below are ranked from highest to lowest on a model designed to assess value, and all are considered “buys.” Stocks are rewarded for superior rates of dividend growth and revenue growth, as well as for high yields and low payout ratios. Operating cash flow over the past 12 months must be positive, and sufficient to cover the dividend. They also trade at discounts to multiple five-year average valuation measures that include price to sales (P/S), price to book value (P/BV), price to current year expected earnings (P/E), price to cash flow per share (P/CF), and enterprise value/EBITDA.

To view the complete 27-stock Forbes Dividend Investor portfolio, click here to begin your 90-day risk-free subscription to Forbes Divdend Investor and/or Forbes Premium Income Report, both of which are written and edited by John Dobosz, the author of this article.