Top 3 Dividend Stocks to Buy Following the Brexit
June 27, 2016 4:26 pm ET
Britain’s historic referendum on June 24 sets the stage for the region to leave the European Union and venture out on its own. After catching the financial markets by surprise, the move erased more than $2 trillion worth of market capitalization around the world. The effects of the decision are likely to continue until regulators outline a plan to leave the E.U., which could go a long way in reducing uncertainty and calming the jittery markets.
Many investors have begun looking for safer income investments as a way to hedge against these declines. With central banks likely to pursue easing policies, there may be a renewed flight to yield that’s increasingly limited to dividend paying equities.
In this article, we will take a look at three dividend stocks that investors can purchase following the Brexit.
Tobacco companies have proven to be very resilient in the face of market volatility, since they generate predictable recurring revenue that they pay out to shareholders in the form of above-market dividends. Altria Group (NYSE: MO) is a U.S. tobacco company that generates more than $5.5 billion in free cash flow each year that finances a hefty 3.4% dividend yield. In fact, the company has raised its dividend 49 times over the past 46 years in a sign of resilience.
The company’s decision to spin-off its international businesses into Philip Morris (NYSE: PM) years ago also removes a lot of risk stemming from the Brexit. U.S. markets have certainly suffered since the surprise announcement, but the Eurozone is likely to experience a lot more turmoil as it loses one of its most successful members. While the U.S. markets may be marginally overvalued, the underlying economy remains quite robust.
PS Business Parks
Real estate investment trusts (REITs) are another sector that tends to outperform when the market experiences turmoil, since they provide a lofty dividend yield and stable recurring revenue from long-term contracts. PS Business Parks Inc. (NYSE: PSB) is a commercial REIT focused on business parks across California, Texas, Virginia, Florida, Maryland, and Washington that pays a lofty 2.9% dividend yield.
The company’s largest tenants is the U.S. government with about 5.3% of its annualized rental income, followed by large companies like Lockheed Martin and Kaiser Permanente. In addition, the company has significant tenant diversification across numerous industries with no single industry accounting for more than 18% of its revenue. Finally, the firm’s low debt-to-market capitalization ratio means that it’s less leveraged than many peers.
Utilities are another sector that tend to do quite well during uncertain times, since they generate strong recurring revenue with predicable dividend yields. Xcel Energy Inc. (NYSE: XEL) is a public utility that provides electrical services in Minnesota, Wisconsin, Michigan, North Dakota, South Dakota, Colorado, Texas, and New Mexico. With a dividend yield of 3.1%, the company provides investors with a strong reason to buy.
According to JP Morgan analysts, the company is a “historically underappreciated large cap story” that has a tendency to move past regulatory headwinds. The analyst also noted the company’s high quality of earnings, well-placed wind project, and many ways toward the top end of its 4-6% projected growth. The financial services firm upgraded the stock to Overweight from Neutral with a $47 per share price target.
The Bottom Line
Dividend stocks are likely to become top performers following the Brexit as investors flock towards safe-haven investments with guaranteed returns. Those looking for specific opportunities may want to check out Altria Group, PS Business Parks, and Xcel Energy as potentially profitable dividend stocks in the space.