What are we looking for?
Blistering interest rates, a hot economy, high inflation, recession fears, artificial-intelligence hype and an equity market rebound is how we’ve started 2023.
My team member Allan Meyer and I thought we would take a conservative approach and analyze low-volatility, high-dividend-paying stocks using our investment philosophy focused on safety and value. This may appeal to investors looking to add some names that could recover once interest rates start to decline (at some point it’s bound to happen) and income-oriented investors return to the stock market.
We started with U.S. companies in the S&P 500 Index, which is composed of large-cap names, a safety factor as they tend to offer more stability and trading liquidity than smaller companies.
We used beta to identify our low-volatility stocks; it measures how much the stock moves in relation to the general market. We limited the list to companies that have a beta of less than one, which implies they are less volatile than the market. We sorted stocks from least to most volatile based on this metric.
Dividend yield is the projected annualized dividend divided by the recent share price. We focused on high-yielding names that pay out 4 per cent or more, as Allan and I love to get paid while we wait for share-price appreciation.
Dividend payout ratio is the dividend payment divided by earnings per share. A lower number is preferred and may hint that there is room for future dividend increases. We’ve also capped payout at 100 per cent, as we wanted to focus on reliable dividends and anything above that could signal the potential for a cut.
Debt/equity is our final safety measure. It is the debt outstanding divided by shareholder equity. A smaller ratio indicates a company has lower levels of debt or leverage.
Price/earnings is a valuation metric, and the lower the number, the better the value. All companies on the list are projected to have positive earnings or “make money.”
Earnings momentum is the change in annual earnings over the most recent quarter. A positive number means earnings are growing, and vice versa for a negative one.
Lastly, we’ve provided the 52-week total return to track recent performance.
What we found
Coterra Energy Inc. CTRA-N, Pfizer Inc. PFE-N, Kraft Heinz Co. KHC-Q and VICI Properties Inc. VICI-N score well for safety and value. Coterra also has the highest yield, lowest correlation with the market (beta) and a low dividend payout ratio. Perhaps further dividend increases could be in store as a result.
Verizon Communications Inc. VZ-N is tied for the highest dividend yield and boasts the best value, but its debt levels are on the high side. Perhaps this is manageable for a quasi-utility.
VICI blows the group away in earnings momentum.
In general, these low-beta stocks also have low P/E ratios, but mainly negative earnings momentum and returns.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.