Even though the market has rallied substantially off the horrific lows posted in March, the sharp moves up and down are the kind of trading action that gives many investors, especially conservative ones, nightmares. With the CBOE Volatility Index reading still hanging right around the 40 level, that indicates the potential for 2% moves in either direction going forward.
With many conservative investors look for safer, dividend-paying stocks, research from the team at BofA Securities indicates that a certain subset of the group can outperform. In 2016, the firm introduced a new quantitative screening tool, the Yield Advantage (YA) framework, a multifactor approach designed to identify income-generating stocks most likely to outperform a universe of liquid, high dividend-yielding U.S. equities.
A new report from the Yield Advantage team noted this when describing the methodology for selecting stocks that make the cut:
To determine stocks in the Yield Advantage framework, we first defined a universe from which to select stocks for the framework. As a starting point, we use top 1000 largest (by market cap) companies from the US tradable universe excluding OTC traded stocks, ADR/GDR and limited partnerships. From there, we excluded Financials sector stocks. To ensure a liquid set of stocks, we excluded the bottom 10% by average daily trading $ volume (ADTV). From that subset of stocks, we then used the top 200 stocks by the highest trailing dividend yield to construct the liquid high dividend yield universe (LHDY) for the framework. The stocks then selected for the framework are based on the LHDY universe.
The analysts noted two major components used to screen for the stocks in the Yield Advantage group:
- Free Cash Flow/Enterprise Value (High value is more attractive)
- Return on Capital (High value is more attractive).
We screened the companies looking for the conservative plays that also have big upside potential for total return value. These five look like outstanding ideas now. They are rated Buy, and all pay substantial and dependable dividends.
This stock has rallied nicely off the lows posted in March but still offers a solid entry point for investors. Emerson Electric Co. (NYSE: EMR) is a global technology and engineering company providing innovative solutions for customers in industrial, commercial and residential markets.
The company’s Automation Solutions business helps process, hybrid and discrete manufacturers maximize production, protect personnel and the environment while optimizing their energy and operating costs. The Commercial & Residential Solutions business helps ensure human comfort and health, protect food quality and safety, advance energy efficiency and create a sustainable infrastructure.
Shareholders receive a 3.72% dividend. BofA Securities has a $65 price target for the shares, while the Wall Street consensus target is $57.37. Emerson Electric stock closed trading on Monday at $54.29 a share.
This blue chip giant still offers investors a very solid entry point after posting an inline first quarter. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.
IBM’s five major segments are: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for their positive outlook going forward. But note that IBM is among the big corporations with the most debt.
IBM CEO Ginni Rommety, who had been in the position since 2012, stepped down in January and the stock market greeted the news in a very positive manner at the time. Arvind Krishna, who has led the company’s cloud computing business, was named the new chief executive. Rometty will remain as executive chair of the board until the end of the year.
IBM shareholders receive a large 5.35% dividend. The BofA Securities price target is $145, and the consensus target is much lower at $127.29. The final IBM stock trade on Monday came in at $121.68.
This is one of the top aerospace and defense stocks to buy, and many on Wall Street are expecting a very solid continuation of U.S. and foreign defense spending. Lockheed Martin Corp. (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. It also provides a wide range of defense electronics products and IT services.
Being the Pentagon’s prime contractor, Lockheed Martin offers a diverse portfolio of global aerospace, defense, security and advanced technologies. Its leveraged presence in the Army, Air Force, Navy and IT programs guarantees a steady inflow of follow-on orders, not only from the U.S. government but also from many foreign allies of the nation.
Lockheed Martin stock investors receive a 2.50% dividend. The stunning $500 BofA Securities price objective compares with the $438.19 consensus target price and the most recent close at $380.16.
Philip Morris International
This company has continued to grow global market share and its stock makes good sense for total return investors now. Philip Morris International Inc. (NYSE: PM) is one of the largest international cigarette producers, with a share of 28% of the international cigarette/heated tobacco market. Key combustible brands include Parliament, L&M and Marlboro, one of the most valuable brands in the world.
The company is commercializing IQOS, a heat not burn product, in over 40 markets, which could drive earnings in the years to come. Most on Wall Street believe Philip Morris International offers superior underlying growth prospects, both near term and long term. The share price has been weak of late as investors have questioned the growth potential of its reduced risk products, and the overall market weakness has contributed. All of its sales are outside of the United States.
Shareholders receive a 6.39% dividend. BofA Securities has set an $88 price objective. The consensus price target is $83.47, and Philip Morris International stock closed at $73.31 on Monday.
The band is back together and offering a great total return scenario for conservative accounts. ViacomCBS Inc. (NASDAQ: VIAC) is an American multinational media conglomerate based in New York City. The corporation was formed via the re-merger of CBS Corporation and the second incarnation of Viacom on December 4, 2019. Both of them were created from the split of the original Viacom in 2005.
ViacomCBS’s portfolio of brands includes the CBS network and TV production studio, CBS All Access, international broadcast networks, MTV, Nickelodeon, Paramount Network, Comedy Central, BET, VH1, TV Land, Showtime, Simon & Schuster, Paramount Pictures and Pluto TV.
Investors are treated to a 5.83% dividend. The BofA Securities price objective is $21. The consensus target is $24.98. ViacomCBS stock closed at $16.09.
These five top large-cap leaders hit all the metrics for inclusion in the Yield Advantage club, and are all rated Buy. While there is always the possibility that any of the five could lower or even eliminate its dividend, the chances are very slim, as they all have paid reliable dividends for decades.