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TheStreet Open House

3 Dividend Stocks to Buy Ahead of the Fed

Stocks in this article: DOWCSCOMAT

NEW YORK ( TheStreet) -- The market is bracing for changes in policy at the Federal Reserve, which could announce a reduction in stimulus as early as next week, a negative for the stock market, as it suggests the Fed is prepared to allow the U.S. economy to start working on its own.

So, for those with longer-term investment horizons, it makes sense to move into more conservative investments that can weather the volatility likely to accompany the changing policy.

Valuations in the benchmark indexes continue to trade within striking distance of their record highs, and so safety stocks that are likely to perform best will be seen in companies that pay higher yields relative to industry counterparts. This approach helps screen out weaker companies unable to generate the profits needed to match those dividend payouts. These three dividend yielders should perform well, even if the Fed starts to wind down its bond purchases as expected.

What we are looking for in dividend picks is a strong payout record that is supported by the company's balance sheet. Here, we will look at three companies in strong positions in their sectors and likely to trade in a stable fashion even after the Fed begins to remove stimulus from the economy.

First, we look at the tech sector and Cisco Systems (CSCO), a company that has drastically reduced spending and that is hoarding cash that can be used to sustain its dividends long term.

Cisco recently raised its quarterly dividend to 17 cents per share from 14 cents, and the company is likely to see growth from increased product purchases from telecoms and other outlets, as the broader economy continues to recover. Projected revenue growth of about 7% suggests that Cisco will continue to generate cash, as long as it maintains its margins.

From a valuation perspective, the stock is trading at a price-to-earnings ratio below 13, and when combined with the 2.8% dividend yield, the stock is an attractive prospect at current levels.

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