Fed Signal Boosts Dividend Stocks: Is Now the Time to Invest?

The Federal Reserve has officially signaled that interest rate hikes have peaked and that rate cuts will begin later this year. Since early 2022, the Federal Reserve in the United States has increased the rate it charges banks, leading to higher interest rates for bank and savings products. Higher interest rates make slowly growing dividend stocks less attractive. The rationale is that if one can achieve returns on a savings account, why take the risk of a dividend stock whose value might fall? For this reason, the stocks of British American Tobacco and Altria Group have stagnated in recent years. However, everything changed this summer. Both stocks have surged significantly in the last three months and have outperformed the broad market index S&P 500 during this period. Altria Group, owner of the leading premium brand Marlboro, also owns the NJOY nicotine vaping brand, Middleton Cigars, On! nicotine pouches, and a significant stake in Anheuser Busch. Altria currently has a dividend yield of 7.29%, down from over 9% at the beginning of the year. Investors are concerned about declining sales of Marlboro in the U.S. The volume declines add up to over 10% this year alone. Nonetheless, Altria's operating income has increased by 51.8% over the past ten years. This is due to its pricing power. Additionally, there are many other segments that can drive profit growth, such as cigars and high-growth markets like vaping and nicotine pouches. Altria's share buyback programs have reduced outstanding shares by 13.7% over the past ten years, facilitating the growth of the dividend per share. Free cash flow per share has increased by 125%, and further growth seems likely as long as the company adheres to these strategies. The other dividend giant, British American Tobacco, offers an even higher dividend yield of 7.8%. Although the company faces similar challenges in the shrinking U.S. market, it also has a strong international presence, which means slower declining volumes outside the U.S. However, there is an exchange rate risk that can impact earnings if the U.S. dollar appreciates. British American Tobacco is also strongly positioned in tobacco-free nicotine products like Vuse (vaping) and Velo (nicotine pouches). These products now account for 16.5% of sales and became profitable in 2023. This segment could enable the company to continue its growth, thereby maintaining or even increasing its dividend. In a time of falling interest rates, dividend stocks, particularly those with high yields like Altria and British American Tobacco, can be very attractive. However, the question remains: Are these dividends secure? Both companies appear well-prepared to secure and possibly increase their dividends through price increases and the expansion of new business areas.