Rising interest rates usually hurt dividend-paying stocks, which appeal less to investors as bond yields get bigger. But there’s an exception to this rule: stocks of companies that consistently increase dividends, sending “a signal to the market of their own growth prospects,” says Anwiti Bahuguna, senior portfolio manager of global asset allocation for Columbia Threadneedle. Such companies tend to outperform over the long term—and to lose less during market corrections.
A prime example is Apple. After reintroducing a dividend in 2012, Apple (AAPL) has raised it annually and is on track to pay more over the next 12 months than any other company (edging past current champ Exxon Mobil (XOM)). Given that its cash hoard now tops $250 billion, investors may see more of the same, especially if Congress enacts a tax cut or holiday for overseas cash. Still, Apple trades at a 15% discount to the S&P 500. “That doesn’t really compute for us,” says Ankur Crawford, manager of the $5.4 billion Alger Spectra Fund. “It’s cheap.”
Matt Quinlan, comanager of the $83 billion Franklin Income Fund, favors Texas Instruments (TXN), which has raised its dividend for 13 years straight. No. 1 in a lucrative niche of semiconductors called analog, TI makes chips used in biometric readers, 3D printers, and robotic equipment, giving it a stable revenue stream. Home Depot (HD) has grown its dividend 22% in the past five years, while buying back hundreds of millions of shares. With a strengthening economy and real estate market, “you have all of the stuff that makes a Home Depot work at this time in the cycle,” says Susan Hirsch of TIAA Investments.
For more yield, Brian McMahon, who comanages the $15.8 billion Thornburg Investment Income Builder Fund, recommends going overseas, where tax codes often encourage high dividends. He likes energy giant Royal Dutch Shell (RDS-A), whose U.S.-listed shares yield 6.7%, and Swiss bank UBS (UBS), which yields 3.6%.
Texas Instruments (TXN)
Home Depot (HD)
Royal Dutch Shell (RDS-A)
This article is part of Fortune’s 2017 Midyear Investor’s Guide feature. For our picks in other sectors, click on the links below:
- Why Google and Amazon Top the List of the 6 Best Tech Stocks to Buy
- How to Invest In Bonds Even if Interest Rates Rise
- The 5 Best Stocks and ETFs to Invest in China and India Now
- The 3 Best Oil Stocks to Buy Right Now—Even if Energy Prices Fall
- The 3 Best Bank Stocks to Buy Now—Whether Tax Reform Happens or Not
This article appears as part of the Midyear Investor’s Guide package in the June 1, 2017 issue of Fortune.