A Dividend Investing Strategy To Consider For Lower Interest Rates |
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Just a day after the Federal Reserve lowered interest rates by half a point, The Juice looked at our savings account and saw that the bank we use already dropped our interest rate from 4.95% to 4.44%. That didn’t take long! To their credit, Wealthfront (who we don’t use) sent us an email that said: “The Fed just announced a 50 bps rate cut, but Wealthfront’s award-winning high-yield Cash Account is still offering 5.00% APY for all clients (10x the national average), and 5.50% APY for clients who refer a friend.” We thought something like this might happen. |
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In early August, we discussed what banks and firms such as Wealthfront and competitor Betterment might do when the Fed starts acting. We conducted the analysis by comparing their rates today to what they were back in the day when the Federal Funds Rate was low: If you go to Betterment’s website today, it puts in bold type so you can’t miss it, a 5% APY offer for its “Cash Reserves” account. We used the Wayback Machine, which lets you look at old, archived web pages, and found that, in August 2022, the same Betterment page didn’t highlight the interest rate on this very same account. It merely touted it as a “smart, secure home for your cash” and, in the fine print at the bottom of the page, listed a 1.6% APY! So, this news from Wealtfront is encouraging. And could be part of a strategy to keep savers from closing their accounts as interest rates fall. We’ll keep an eye on this and see what happens. But it’s not a bad move to keep your rates high and find other areas of the business where you can offset the amped-up payments you continue making to savers when everybody else — we anticipate — starts cutting interest rates on deposit accounts alongside Fed cuts. For the record, like Wealthfront, Betterment still has its APY set between 5.0% and 5.5%. Betterment’s conditions for the 0.5% perk are a qualifying deposit with a three-month window. Of course, savers might close their accounts and become investors with that money. If and when they do, they’ll quite possibly quench their thirst for income with dividends stocks. Something The Juice has long advocated. Let’s get more specific with a strategy you can implement, after we cover some basics on and things to watch out for with dividend investing. A dividend growth stock is a stock that increases its dividend consistently. Ideally, on an annual basis. So, we’re not talking about revenue or profit growth here. Though, those are two nice things to have and often go along with consistent dividend increases. For example, take Intel (INTC), a stock we would not be buying right now. It is cutting its workforce. Sales and profits are down. Guidance is weak. And the dividend is going down. In 2022, Intel paid out $1.46 per share annually. In 2023, Intel cut its dividend to a payment of $0.74 per share annually. Now, as part of its fiscal Q4/2024 earnings report, Intel announced it will stop paying its dividend for the time being. The poor performance was the writing on the wall. Ideally, you want to buy revenue and profit growth, industry leaders with rising dividends. The other thing to look out for, which is in direct relation to the strategy we think you should consider, is dividend yield. Earlier this year, The Juice explained dividend yield: Dividend yield tells you how much a company pays out in dividends relative to its stock price (dividend divided by stock price, multiplied by 100 to get a percentage). For example, if a stock trades for $50 and pays a $2 annual dividend, its dividend yield is 4%. A high yield means more income. If you own 100 shares of that $50 stock that yields 4%, you can expect to receive $200 in annual income (all else, such dividend reinvestment, equal). You can also get to this number by multiplying the dividend ($2.00) by the number of shares you own (100). Of course, as a stock price fluctuates, so will its dividend yield. Holding the annual dividend constant, as the share price decreases, dividend yield increases. The inverse holds true. Therefore, a high yield can be — and often is — the function of a falling stock price. Tying it all together, as we noted then, “Ideally, you want a rising stock price alongside regular dividend increases.” So the strategy to keep generating income in a lower(ing) interest rate environment. Buy sold, high-yielding dividend stocks. This doesn’t mean look for the highest number in the yield column. It means buy dividend stocks with impressive yields alongside other impressive metrics, such as dividend, revenue and sales growth. Some great examples of stocks like this to help get the wheels turning.
The Bottom Line: Find a good stock screener. Like our favorite, which you can find in today’s Freshly Squeezed section. Set it for the minimum yield you seek alongside revenue and profit growth parameters. Have fun with it. The key is to find growing companies with dividend increase streaks and solid yields. Often, they’ll be undervalued, which means you might be getting in at the time when you can expect the stock to start strengthening. While this might lower the yield, it’s all good. The best dividend investors combine stock price appreciation with sound and reliable dividend income. Paint a comprehensive picture like this and you’ll be good to go. In a future Juice we’ll go over exactly how to screen for good dividend stocks. |
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