Despite the U.S. and China announcing a 90-day pause on elevated tariff rates against one another, there is still a 10% blanket tariff rate on imports from most of the country’s major trading partners, as well as 25% tariffs on steel, aluminum, and some auto parts. Additionally, negotiations are ongoing and while the worst of the trade war looks to be in the past, investors are still unclear about exactly how things will shake out.
After so much market volatility, some investors may prefer to hunt for stocks that generate solid passive income. If they happen to be at least somewhat insulated from the ongoing trade war, that’s even better. Here are two stocks that fit into this theme.
Verizon: The ability to pass higher costs on to customers
The massive telecommunications company Verizon (VZ 1.14%) is headquartered in New York City, and made it abundantly clear in April that consumers would be on the hook for higher prices resulting from tariffs, if they were to stay at elevated rates. Long term, this may not be such a popular decision with customers, but financially it does offer some insulation from tariffs. Verizon also should have pricing power, given its well-known brand and the necessity of its offerings including internet and phone service.
On its first-quarter earnings call, Verizon’s CEO Hans Vestberg said the company is working with suppliers to lessen the impact of tariffs as much as possible for customers. He also said that the company’s broad array of services positions it for success in any kind of environment.
Verizon is also an excellent stock to own for those seeking a strong dividend. Its yield is now over 6.2% and Verizon increased its dividend for 18 consecutive years. The company also looks positioned to continue growing the dividend. Verizon’s payout ratio over the last year is about 64%, meaning dividend payments only equate to about 64% of earnings. The company’s free cash flow yield, another good way to assess dividend viability, comfortably exceeds the dividend yield at 11%.
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Regions Financial: A way to play the U.S. bank trade
Since the Great Recession, bank stocks woefully underperformed the broader market and been left in the dust by new exciting sectors like tech and artificial intelligence. Banks could be indirectly impacted by tariffs if they slow the economy. However, banks can also benefit from higher long-term rates, which influence a lot of their loan yields, especially if short-term rates on Treasury yields stay lower, leading to a steepening of the yield curve. The sector is much healthier than it was during the Great Recession, with much better loan underwriting and ample levels of capital and liquidity.
Regions Financial (RF 0.60%) is headquartered in the Southeast U.S., which has experienced some of the best population growth in recent years. Regional banks can often be beneficiaries of their regional economies, so one strategy is to find strong-performing banks in these areas. Regions has taken advantage of population growth and higher savings and wages among its customer base to build a strong, low-cost deposit base with over 30% of total deposits from noninterest-bearing sources, which are essentially a free source of funding for the bank. Over the last five years, Region’s stock is up nearly 145% (as of May 15).
Banks should also benefit immensely from deregulation by the Trump administration. I’m expecting much lower regulatory capital requirements, which will allow banks to lend more, and the potential laxing of regulations that currently limit growth. Furthermore, regulators have already signaled the green light for mergers and acquisitions, and the large regional bank space is one area that is ripe for consolidation, which could lead to higher multiples.
Regions currently has a strong dividend yield of 4.4% and the company paid and increased its dividend for the last 13 years. Like most banks, Regions is sitting on plenty of excess capital. Management plans to keep its dividend payout ratio in the 40% to 50% range, leaving plenty of room for future dividend growth.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool recommends Regions Financial and Verizon Communications. The Motley Fool has a disclosure policy.