The world’s economies have been on life support for months. Major therapeutic efforts to combat this are coming from global central banks, which have been more aggressive than ever in pumping liquidity into financial systems to varying degrees of success. Against that backdrop, let’s discuss the need for dividend stocks in every investment portfolio.
Like with most medicines, there are always side effects. Such loose monetary policies mean that there is little fixed-income reward for cash anywhere on the planet. Interest rates on accounts is near nil and bond yields are on life support. In fact the U.S. is the only major economy that still has positive yields there. In Europe investors are losing money on bonds they buy.
While it seems like lunacy, it is indeed happening, so investors seeking fixed income returns have no choice but seek that in equities. Today we discuss three stocks that are viable venues for this. TINA (the acronym for There is No Alternative) is widely used for U.S. Bonds, but it also applies to dividend stocks. Investors who want consistent returns have no choice but buy these assets, thereby placing a buy-the-dip trade below current prices.
Here are three dividend stocks I think are worth your time here:
Read on to learn more about each of these picks.
Dividend Stocks: JPM Morgan (JPM)
Dividend Yield: 3.6%
JPMorgan reported earnings this week, and wall Street liked the results. JPM stock rallied on the news, even though the upside surprise came from their investment activities. The business of banking is still against the ropes. The zero-interest-rate environment makes it difficult for them to thrive only from the core side of the business. Almost all of them have to resort to other sources of income to make up deficits. For example Goldman Sachs (NYSE:GS) this year is making an effort to enter the retail segment, even striking deals with the likes of Apple (NASDAQ:AAPL).
What is important for the discussion today is that JPMorgan pays a 3.6% dividend yield. More importantly, it is intact and safe for the foreseeable future.
The Fed has just put all U.S. banks through a tough stress test with new virus crisis elements, and they will test them again later this year. So far, JPM has passed all of these, so it is free to continue paying out the dividend unrestricted. Since the global economy is still severely sick, it is important to choose dividend stocks that are not in danger of changing that fact. JPM is atop of that list and has the blessing of U.S. regulators to boot.
Besides, owning the shares for capital appreciation is also smart. This is a cheap stock so by definition the downside risk is small. Over time, if equity markets are higher, then JPM stock is also higher — albeit not a superstar momentum champion there.
Dividend Yield: 5.8%
The oil market has been in extreme turmoil for months — and to the nth degree. The good news is that the bulls have recovered hard off the bottom, but the rally statistics of +200% should not inspire confidence. This is because the bounce came from a negative -$35 freak value for crude oil futures.
Regardless, the good news from that is that oil stocks who are historically dividend stocks survived their toughest test of all time. Some of the pain was self-inflicted from pricing wars and the rest was from Covid-19 crisis.
The surviving companies have likely seen their worst days for a long while.
Chevron is one of the strongest two, and it passed the test with flying colors. The management team is savvy and has seen dozens of major crisis before, so they had no issues navigating this one with ease. Early and throughout the crisis, the company CEO Michael Wirth confidently and consistently delivered the message that they are on firm financial footing and that the dividend was sacrosanct. To do this, they immediately cut spending and left a bunch of it more to go if the tough times linger.
Fundamentally, the CVX statistics are not exciting and they do not inspire growth. But what they lack in pizzazz they make up for it in consistency. Chevron pays an almost 6% dividend yield while usually that raises flags for me, but in this case I can make an exception. I have no reason to doubt the actual promises from the CEO at this point in time.
Exxon Mobil (XOM)
Dividend Yield: 7.8%
The argument to buy Exxon Mobil stock as a dividend stock is almost identical to CVX. Both companies have similar fundamental statistics and this one also pays a heftier yield. Usually near-8% is alarmingly high but here too the company reiterated its commitment to it on several occasions.
The XOM trailing price-to-earnings ratio is almost 17, which is higher than I like. But these are unusual times as long as economies are still struggling with global quarantines. Demand was almost cut to zero for an extended period of time, so it is only natural for Exxon to have suffered a bit.
The world is trying to reopen for business but we are experiencing snags along the way. For example, recently California’s recovery process caused a spike in new Covid-19 cases so Governor Gavin Newsome reordered the state shutdown. This has a physical and psychological impact on demand
Add to this that OPEC rhetoric this week flipped bearish oil prices as the headlines were that the producers will be loosening production caps soon. This puts downside pressure on oil prices, which also means tougher conditions for XOM and CVX.
Nevertheless, I doubt that anything will compare to the test that hit the world in March of 2020.
In the olden days, people saved money in banks and they reaped the rewards from that in the form of interest payments. In this sub-zero interest environment, this is no longer true. The second-best substitute to this is buying shares of safe stocks that pay decent dividends. It is also important to avoid unusually high rewards, because those are not likely free of drama. Great dividends usually come at a high risk cost. The three today are proven safe.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.