The Melt-Up Rally Could Be Over: Rotate to These Safe Dividend Stocks Now

Investing

Published: June 5, 2020 7:22 am

It was nice while it lasted, but the “melt-up” rally we enjoyed from the mid-March lows could be close to over. The market has rallied a stunning 40% from the lows, and many stocks, especially those of technology momentum companies, are actually sitting at 52-week highs. While there are still mountains of cash sitting in money markets and savings accounts, rather than being ammo for a continued march higher, those funds may stay there as investors seek safe havens.

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Given that bond yields are still very unattractive, we decided to look at the sectors that have underperformed during the rally for solid and safe large-cap leaders that pay dependable dividends in the financial and energy sectors. Both have trailed technology and the overall market in a big way.

We screened the BofA Securities research universe looking for companies in those two sectors that look like good ideas for investors worried about a market that is very overbought. These five stocks stood out, and all are rated Buy at the firm.

Chevron

This integrated leader is a safer way for investors looking to be positioned in the energy sector. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company, with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas.

Chevron, which is among the companies with the largest corporate debt, recently became the latest major oil company to slash spending after halting its $5 billion-a-year share buyback and halving spending in the Permian Basin, which means a large decrease in projected output from America’s biggest shale region.

The California-based oil giant has said that it would lower projected 2020 capital spending by 20%, or $4 billion. The Permian will account for the largest single element of that reduction, translating into 125,000 fewer barrels of oil equivalent per day than previously forecast, a quantity equal to about 2.5% of the basin’s total current production.

The analysts are positive and noted this after earnings:

Chevron earnings beat reflects operational momentum, but we see stress tested guidance as the key takeaway from the quarter. With uncertainty ahead, Chevron top in class balance sheet and capital flexibility stand out, w/ $30 billion in liquidity to navigate a downturn. New guidance on sustaining capital – below our prior estimate, raises our price objective. Retain Buy as a top defensive name.

Shareholders receive a 5.36% dividend, which the analysts feel will remain at current levels. BofA Securities recently raised its price target on the shares to $97. The Wall Street consensus target is $97 as well. Chevron stock ended Thursday’s trading at $96.28.

Citigroup

Shares of this top bank are trading at the lowest levels since 2016. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.

Trading at a still very cheap 7.2 times estimated 2020 earnings, this one looks very reasonable in what remains a volatile stock market.

Citigroup stockholders receive a 3.67% dividend. The BofA Securities price target is $57, while the consensus target is up at $62.23. Shares closed trading Thursday up over 4% to $55.65.

Exxon

This is another safer long-term play for conservative investors, and the energy giant is trading at 17-year lows. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

Exxon also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products.