Weathering the stock market storm with high yielding dividend paying equities
What are investors to do during the current difficult equity market environment? Equity markets are being pummeled, fixed income yields are largely unappealing and volatility is on the rise. High quality, high dividend yielding stocks offer an opportunity to remain in equity markets until short term equity market woes are settled. Investors frequently will receive a flow of income that supersedes interest payments received from fixed income securities of comparable value.
History is repeating itself. Recessions over the past 40 years have been followed by a rapid equity market recovery due to anticipation of improving prospects. The most recent recovery occurred from March 2009 to April 2010. Each recovery is followed by a temporary period of stagnant economic growth and a difficult market environment that normally lasts five months to one year. The current stagnant period has encouraged many investors to exit equity markets and to hold large cash positions. However, recent weakness in equity markets has depressed high quality, high yielding equities to a level where they have attractive longer term value. Rather than trying to time the bottom, investors have an opportunity to partake in depreciated assets now while earning an income during a brief period of slowing economic growth.
Many equities with high dividend yields are well established, able to endure economic slowdowns, less volatile than the overall market and show positive seasonal tendencies through the summer months. Case in point – Established consumer staple company Altria Group (MO) has been outperforming equity markets for the last couple of weeks, pays a dividend yield of around seven percent and has just entered into a period of seasonal strength lasting until January. In addition, the stock’s Beta, a measure of volatility, sits at a low 0.39, and expected price appreciation projected by analyst consensus estimates is 17% above the current market value. The stock has paid a steady dividend for many years with no discernable evidence of a decline. Equities such as Altria Group are susceptible to a market decline. However, downside risk has been significantly reduced by their current high dividend yield and their long history of maintaining and raising dividends. Their high yield offers an attractive alternative to cash and fixed income products that currently offer little return. The yield on U.S. 10 year Treasuries fell last week to 2.90%. The yield on Canadian short term Treasury Bills currently is near 0.50%. The yield on U.S. short term Treasury Bills currently is near 0.25%.
High yielding, large-capitalization equities in the S&P 500 Index are ideal candidates for the strategy. Payouts are relatively assured. Names such as AT&T (T), Verizon (VZ), Health Care REIT (HCN) and Scana Corporation (SCG) provide dividend yields of at least five percent, have positive seasonal tendencies until January and are projected to appreciate in value according to analyst estimates. Relative stability of their earnings and cash flows offers long-term protection against market volatility as well as at least modest possibilities for growth if their dividends continue to rise.
The recent equity market decline is just another segment in the longer term cyclical market recovery that will slowly return equity prices to pre-recession levels. Equity markets recently have returned to a level where they offer good longer term value. High quality, high yielding, dividend paying stocks are the ideal investment to benefit from positive returns in the short and long term.
Stocks mentioned in this post: HCN, MO, SCG, T, VZ
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