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Industry Outlook

Should the United Kingdom (UK) remain a member of the European Union (EU) or leave? This is the burning question these days.

By the end of June, the UK will determine whether it will remain a part of EU or exit. This possibility is now widely known as ‘Brexit.’ In a poll on Jun 23, votes in favor of or against Brexit will be requested to decide the fate of the nation.

As the possibility of UK’s exit from the EU intensified after London mayor Boris Johnson joined the campaign, the pound tumbled to a seven-year low against the dollar. The currency fell 2.3% to $1.4067 on February 22, 2016, its biggest one-day fall since early 2009. The pound also weakened against other major currencies as investors pulled money away from UK assets.

Apart from the pound, the euro could also come under pressure against other major currencies if the second-largest EU economy makes its exit, shaking investor confidence in an already weak Europe.

Many market participants believe a "Brexit" would lead to a weaker currency owing to worries about Britain's £229 billion annual trade with the EU, which could suffer if new trade barriers are raised. One of the major advantages of EU is free trade between member nations, which makes exporting goods to other EU countries easier and cheaper for British companies. Thus, Brexit could have a negative impact on Britain’s GDP. Lower GDP growth and tougher export conditions would hit several sectors like retail and financial services among others and therefore have an unfavorable impact on British equities.

On the other side of the coin, the country could form deeper ties with other countries outside the EU. However, it can’t be exactly predicted what would happen if Britain exits the EU, as there has been no precedence.

Moody’s believes the economic costs would more than offset the benefits if Britain chooses to leave the EU. The agency even stated that it would consider assigning a “negative outlook” to UK’s current Aa1 rating with a “stable” outlook now, which would imply a higher chance of a downgrade in the future.

With the market already pricing in some probability of Brexit, a contrary outcome could result in the rise of the sterling and outperforming equities.

Whether the UK will ultimately choose Brexit or select to remain in the EU remains to be seen. But polls and political propaganda are likely to continue to stimulate uncertainty in the short term.

Amid such uncertainty, investors should invest in solid dividend paying stocks. Not only do these stocks offer steady income but also provide a cushion against equity market risks. Moving forward, dividend-paying stocks are proven outperformers over the long term and are relatively safer for creating wealth.

The Strategy

Using our new style score system, we have zeroed in on five dividend paying stocks that flaunt excellent prospects and might prove to be a boon for growth investors. Notably, our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Value Style Scores of ‘A’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) handily beat other stocks.

Each of the stocks below offers dividend yields of 3% or more,sports a beta less than .75, has a solid Zacks Rank and an attractive Value Style Score. Moreover, these stocks have P/E below 20, which makes them all the more attractive.

The Picks

Headquartered in Plano, TX, BG Staffing, Inc. (BGSF - Snapshot Report) is a national provider of temporary staffing services across a diverse set of industries. It offers commercial and professional temporary staffing, temp-to-perm, and permanent placement services to a variety of industries.

Zacks Rank: #1

Value Score: A

Dividend Yield: 6.56%

Beta: -.11

P/E: 9.36 (versus 14.1 for the industry)

Centrica plc (CPYYY - Snapshot Report) features in the top 30 of FTSE100 with growing energy businesses in the UK, North America and Europe. It secures and supplies gas and electricity to millions of homes and businesses and offers a distinctive range of home energy solutions and low-carbon products and services.

Zacks Rank: #2

Value Score: A

Dividend Yield: 5.76%

Beta: .65

P/E: 12.64 (versus 20.40 for the industry)

Ellington Residential Mortgage REIT (EARN - Snapshot Report) is a real estate investment trust that specializes in acquiring, investing in and managing residential mortgage and real estate-related assets. Ellington Residential Mortgage REIT is based in the United States.

Zacks Rank: #2

Value Score: A

Dividend Yield: 13.77%

Beta: .49

P/E: 6.08 (versus 8.80 for the industry)

Based in Salford, the United Kingdom,Luxfer Holdings PLC (LXFR - Snapshot Report) is a materials technology company specializing in the design, manufacture and supply of high-performance materials, components and gas cylinders. The company has two divisions, Elektron and Gas Cylinders. Luxfer also offers recycling services and magnesium powders throughout global networks.

Zacks Rank: #1

Value Score: A

Dividend Yield: 3.59%

Beta: .6

P/E: 9.97 (versus 19.40 for the industry)

Tsingtao Brewery Company Limited (TSGTY - Snapshot Report) engages in the production and distribution of beer products in the People's Republic of China. The company sells its beer under the trademark of TSINGTAO BEER. It also offers malt, car rental services, warehousing, packaging, logistic services and travel services. Tsingtao Brewery Company Limited is based in Qingdao, the People's Republic of China.

Zacks Rank: #2

Value Score: A

Dividend Yield: 3.52%

Beta: .39

P/E: 17.72 (versus 25.40 for the industry)

Bottom Line

Investing in these stocks should ensure a steady stream of income that is likely to grow over time. Thus it will be a prudent move for investors to add these top-quality dividend stocks to their portfolio, banking on the Zacks Rank, beta, dividend yield and style score system, as these could yield impressive returns going forward.

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