A report from UBS equity strategists recommends buying growth over value-style indices. It favors dividend-paying stocks because they are likely to outperform in this economic environment. The slides below are 12 stocks that pay above the 2.5% average yield from UBS’ list of 40 stocks. As interest rates continue to rise, downside risks for the stock market increase, and navigating the future becomes more uncertain.
The Federal Open Market Committee has now hiked its key interest rate by 75 basis points three straight times. Their most recent decision increased the fed funds rate to a range between 3% and 3.25%, the highest since early 2008. The median forecast from the committee now estimates a 4.4% rate by year-end.
Amid their concerns about rates, investors breathed a sigh of relief in Q3 as early second-quarter earnings results came in better than expected. The S&P 500 was up as much as 14% at one point during the quarter.
But it was a rally that turned out to be short-lived: the reality of higher rates reversed the market and led to its third-straight quarterly loss, the first since 2009.
The Fed’s hawkish stance on fighting inflation means any short-term optimism will likely continue to result in bear-market rallies. Wall Street is beginning to accept that the Fed and its rate hikes will have the final say over the macroeconomic outlook.
Higher rates portend lower consumer demand, sluggish stock prices, and a slower economic growth. There’s also the risk of a hard landing, in which the Fed’s rate hikes push the economy into a recession.
Regardless of whether there’s a recession or not, the higher probability of one is good news for high-quality stocks, according to a September 6 note from UBS Head of US Equity Strategy Keith Parker and his team. This group of stocks, with relatively stronger balance sheets and stable earnings, has historically outperformed over the 12-month period that follows higher recession odds, they said.
Additionally, stocks that pay higher dividend yields and have better growth prospects tend to outperform in later cycles. The note adds that dividends per share (DPS) are expected to outpace earnings per share. This expectation is strengthened by The Inflation Reduction Act, which included a 1% tax on share repurchases. UBS noted that this could cause a 1.5% increase in corporate dividend payouts.
Below is a list of 12 stocks with above-list-average dividend yields of 2.5%, pulled from UBS’ screen of 40 stocks on the S&P 1500 that have strong relative DPS upside over the next six months. The report overlaid a minimum 1.5% dividend yield and buyback yield criteria.
1. ConocoPhillips
Markets Insider Ticker: COP
Market cap ($billion): $140
Next-twelve-months dividend yield: 2.8
Last-twelve-months buyback yield: 4.2
Dividend upgrade probability: 68.8%
2. AGCO Corporation
Markets Insider Ticker: AGCO
Market cap ($billion): $8
Next-twelve-months dividend yield: 4.6
Last-twelve-months buyback yield: 1.6
Dividend upgrade probability: 60.8%
4. HP Inc.
Markets Insider Ticker: HPQ
Market cap ($billion): $29
Next-twelve-months dividend yield: 3.1
Last-twelve-months buyback yield: 16.8
Dividend upgrade probability: 54.5%
5. PDC Energy, Inc.
Markets Insider Ticker: PDCE
Market cap ($billion): $6
Next-twelve-months dividend yield: 4.4
Last-twelve-months buyback yield: 6.5
Dividend upgrade probability: 54.0%
6. SLM Corp
Markets Insider Ticker: SLM
Market cap ($billion): $4
Next-twelve-months dividend yield: 3.2
Last-twelve-months buyback yield: 28.1
Dividend upgrade probability: 49.7%
7. Amgen Inc.
Markets Insider Ticker: AMGN
Market cap ($billion): $130
Next-twelve-months dividend yield: 3.3
Last-twelve-months buyback yield: 6.8
Dividend upgrade probability: 47.2%
8. J.M. Smucker Company
Markets Insider Ticker: SJM
Market cap ($billion): $15
Next-twelve-months dividend yield: 3.1
Last-twelve-months buyback yield: 1.7
Dividend upgrade probability: 44.2%
9. WestRock Company
Markets Insider Ticker: WRK
Market cap ($billion): $10
Next-twelve-months dividend yield: 2.7
Last-twelve-months buyback yield: 6.8
Dividend upgrade probability: 40.7%
10. Bristol-Myers Squibb Company
Markets Insider Ticker: BMY
Market cap ($billion): $146
Next-twelve-months dividend yield: 3.1
Last-twelve-months buyback yield: 5.4
Dividend upgrade probability: 27.8%
11. NRG Energy, Inc.
Markets Insider Ticker: NRG
Market cap ($billion): $10
Next-twelve-months dividend yield: 3.5
Last-twelve-months buyback yield: 4.1
Dividend upgrade probability: 24.4%
12. Weyerhaeuser Company
Markets Insider Ticker: WY
Market cap ($billion): $25
Next-twelve-months dividend yield: 4.9
Last-twelve-months buyback yield: 1.3
Dividend upgrade probability: 23.6%