Short- and long-term bond yields have crashed to all-time lows in reaction to the coronavirus slowdown and the Federal Reserve’s 50-basis-point rate cut. Low yields will encourage risk taking through equities and real estate, but they’re unlikely to restart the slumping economy because money is already “cheap” and employers have entered a defensive mode that is focused on survival rather than debt assumption.
The bond rally has contributed to a perfect storm for high-yield stockswhich now pay far more than bonds or bank accounts. This group is also highly defensive as a rule, filled with soup and cereal companies that are built to withstand economic downturns and even bear markets. We saw the first wave of a fresh rotation into these instruments during Monday’s big bounce when defensive plays outperformed CATCH and other growth stocks by a wide margin.
However, not all high-yield stocks offer sound investing choices. Specifically, companies under extreme stress and long-time laggards raise dividends because it’s the only way to attract buying interest. There isn’t much point owning an equity that pays a 5.00% dividend when it’s dropping 15% or 20% per year on average. Exxon Mobil Corporation (XOM) offers a perfect example, paying a hefty 6.46% yield, but the stock topped out six years ago and just hit a 15-year low.
Verizon Communications Inc. (VZ) currently pays a 4.29% forward dividend yield. The stock posted an all-time high at $64.75 in 1999 and entered a multi-year downtrend that finally bottomed out in the low $20s during the 2008 economic collapse. It surged off the low into the new decade, lifting to $54.31 in 2013. Gains since that time have been modest, to say the least, with the stock trading less than three points above that peak in Wednesday’s session.
However, the slow grind against multi-decade resistance has lifted the 50-month exponential moving average (EMA) to the highest level in the stock’s public history. Taken together with solid accumulation readings, the long-term outlook is excellent, predicting an eventual breakout to new highs. Shareholders can collect the impressive dividend while waiting for that event, which could come more quickly if U.S. courts affirm the repeal of net neutrality laws.
Campbell Soup Company (CPB) currently pays a 2.92% forward dividend yield, which isn’t as exciting as other safe-haven plays, but the stock has been gaining ground in a steady uptrend since posting a seven-year low at the start of 2019. A well-executed reorganization plan has underpinned the 50% return before dividends in the past 14 months, illustrated by this morning’s impressive second quarter 2020 earnings report.
The stock topped out at $62.88 in 1998 following a multi-year uptrend and entered a long-term downtrend that bottomed out in the upper teens in 2002. A shallow 14-year uptrend stalled just five points above the prior peak in the summer of 2016, giving way to a painful and long-lasting downturn into the 2019 low. The stock has now retraced just half of the prior losses, indicating plenty of potential upside in coming months.
Dominion Energy, Inc. (D) and other utility plays offer traditional high-yield exposure and safe-haven status. This stock pays a 4.47% forward dividend yield and is also trading relatively close to an all-time high, allowing shareholders to enjoy the financial benefits of both worlds. Just keep in mind that political factors can influence these issues because many are highly regulated by state and local governments.
A multi-year uptrend topped out near $80 in 2015, giving way to a pullback that found support in the mid-$60s. A 2017 breakout attempt failed, reinforcing range resistance, ahead of a major decline that dumped the stock to a six-year low in June 2018. It has been on the recovery trail since that time, breaking out to a new high just 10 days ago. The coronavirus outbreak has triggered a failed breakoutbut this pullback could eventually offer a low-risk buying opportunity near $80.
The Bottom Line
High-dividend stocks could outperform growth and cyclical issues in reaction to the lowest bond yields on record.
Disclosure: The author held Verizon Communications and Campbell Soup shares in family accounts at the time of publication.
