Big dividend payers have been raking in significant gains in recent times. This is because investors continue to shy away from risky assets which might turn out to be an erratic earnings season. Instead, they place their bets on dividend payers, which are conceived to be relatively safe investment choices. To top it, the Fed minutes did not lend a clear insight into the interest rate hike possibilities, which bode well for dividend-paying stocks.
The month of October has traditionally seen a rise in volatility, especially when presidential elections are just around the corner. In such a precarious situation, dividend paying stocks are surely tempting picks because of their tremendous financial strength and resistance to market vagaries.
Disappointing Start to Q3
Alcoa Inc. AA had unofficially kicked off the earnings season, with earnings and revenues falling short of expectations. Earnings for the company in the third quarter were 32 cents, below the Zacks Consensus Estimate of 34 cents. Revenues of $5,213 million also failed to beat the Zacks Consensus Estimate of $5,334 million. Alcoa also trimmed its revenue target for its Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions units this year (read more: Alcoa Misses Q3 Earnings, Sales Estimates; Shares Tank).
In the third quarter, earnings growth is expected to take a beating, which will be the sixth quarter in a row of earnings decline for the S&P 500 index. Total earnings for the index are expected to be down 2.9% from the same period last year on 1.2% higher revenues. Earnings growth is expected to be negative for half of the 16 Zacks sectors, led by Energy (- 68.3%), Transportation (- 21.4%) and Autos (- 18.5%) (read more: What Will the Q3 Earnings Season Bring?).
Fed Minutes Fails to Confirm Rate Hike
The Fed minutes showed that officials had kept a rate hike on hold last month despite “reasonable argument” for an increase. Some officials wanted a rate hike soon, while others intend to see further progress toward full employment and rise in inflation.
New York Fed President Bill Dudley, ahead of the release of the minutes, said that “slack” in the labor market was a reason the central bank hasn’t been more aggressive in hiking rates. Even though it is widely expected that the Fed will raise rates after the U.S. presidential elections, traders have placed only a 9% chance of a hike in the month of November (read more: Fed Holds Off Rate Hike for Now: Top 5 Gainers).
Historically, the Fed minutes haven’t been good for stocks the day after its release. The U.S. equities tend to deflate once investors get an idea about the Fed’s views. According to Bespoke Investment Group, the S&P 500 traded lower the day following the minutes on all but one situation this year. The following table shows the S&P 500’s performance the day after Fed minutes were released:
Election to Drive Volatility
Thanks to the upcoming presidential elections, investors are expected to face greater bursts of volatility. The CBOE Volatility Index (VIX), a gauge of near-term investor anxiety, has always risen significantly in the past six presidential elections, except for 1996, when Bill Clinton handily won the re-elections.
Strategists from JPMorgan Chase & Co. JPM led by Dubravko Lakos-Bujas had said that “2016 election will likely be a source of heightened volatility in the weeks ahead of November 8th.” David Kostin and his colleagues at The Goldman Sachs Group, Inc. GS also said that “equity market uncertainty typically rises in the month immediately ahead of presidential elections”.
More uncertainty looms large this month as Brexit woes and doubts over Deutsche Bank AG’s DB liquidity continue to spook investors (read more: 5 Low Beta Stocks to Buy for a Capricious October Market).
Latch on to These 5 Dividend Stocks
Stocks are expected to barely budge this month amid a discouraging start to the third-quarter earnings season. This has already compelled investors to buy big dividend payers like utilities, electronic data device companies and real estate investment trusts. With the Fed holding off a rate hike for now along with election induced volatility, dividend payers are expected to gain further traction.
Hence, it will be prudent to invest in five such topnotch dividend paying stocks. Remember, dividend is mostly paid by companies that boast solid financial structure and healthy underlying fundamentals, and are unperturbed by market turbulence. Additionally, such stocks when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of ‘A’ or ‘B’ are sure to boost your returns. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. You can see the complete list of today’s Zacks #1 Rank stocks here.
DTE Energy Company DTE engages in utility operations. The company has a Zacks Rank #2 and VGM score of ‘B’. DTE Energy has a dividend yield of 3.68% and a 5-year historical dividend growth rate of 5.5%.
Alliance Resource Partners LP ARLP produces and markets coal primarily for utilities and industrial users in the United States. The company has a Zacks Rank #2 and VGM score of ‘A’. Alliance Resource Partners has a dividend yield of 8.33% and its 5-year historical dividend growth rate is pegged at 2.8%.
Seagate Technology plc STX designs, produces, and distributes electronic data storage technology and solutions. The company has Zacks Rank #2 and a VGM score of ‘B’. Seagate Technology has a dividend yield of 4.66% and a 5-year historical dividend growth rate of 24.7%.
Daktronics Inc. DAKT designs, manufactures, and sells a range of electronic display systems and related products worldwide. The company has a Zacks Rank #1 and a VGM score of ‘B’. Daktronics has a dividend yield of 3.11% and its 5-year historical dividend growth rate is 19.4%.
Preferred Apartment Communities, Inc. APTS is a real estate investment trust (REIT). The company has a Zacks Rank #2 and VGM score of ‘A’. Preferred Apartment Communities has a dividend yield of 6.9% and a 5-year historical dividend growth rate of 10.4%.
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