The S&P 500 is off to a solid start this month, but analysts and traders remain cautious since this spike in stocks is due to a rebound in oil prices from recent lows. The fundamental strength of the oil market is still bleak as the massive supply glut continues to persist, which may eventually drag the markets down.
This uncertainty about future price movement makes dividend stocks more attractive as they tend to outperform when the broader markets are subject to gyrations. Moreover, likelihood of rates not going up as fast as the markets once assumed has made dividend paying stocks more appealing. Conversely, investments in the bond market that tends to benefit from a rise in interest rates have lost its lure.
Oil Takes S&P 500 on Rollercoaster Ride
They say it takes two to tango, and the oil price and the S&P 500 have become close partners. Whenever the oil price moves up, the index climbs, while any downward movement in the oil price drags the index down.
The index closed in the red for the first two weeks of February when oil prices plunged to $26.05 a barrel on Feb 11, a 13-year low. However, prices rebounded an incredible 32% to $34.40 a barrel on Tuesday, which eventually helped the S&P 500 to end in the green in the last two weeks of February and also post its best ever start in March since 2002.
This rise in oil prices was primarily due to hopes that major oil producers including Saudi Arabia and Russia will take a decision to stabilize output this month. However, for the freeze deal to be successful, participation from Iran is also necessary. Officials from Iran think this deal is a “joke.” In fact, Iran is making moves to pump an additional 1 million barrels of oil per day in an already oversupplied market.
And it’s also hard to be excited when there is enough supply glut in the U.S. According to the Energy Information Administration, crude oil inventories increased 3.5 million barrels last week to almost 508 million barrels.
Moreover, analysts from Barclays note that those very countries eager for a production freeze are already manufacturing close to their full capacity. They also added that “the recent output freeze talks are unlikely to have any immediate impact on market balances.”
Despite the recent rally, oil prices are down by almost half from year-ago levels when it was around $62 a barrel. Weak underlying fundamentals continue to plague the sector. Hence, the S&P 500 is filled with more uncertainty in the near term with slippery oil dictating the moves. In this case, high quality dividend stocks have become more appealing as their stock prices tend to be less volatile than the market in general.
Fed Rate Hike Uncertainty
Dividend payers are even more in demand as the possibility of a series of rate hikes this year by the Fed becomes slimmer due to wild market swings, slow economic growth, lackluster corporate earnings results and negative interest rates in Japan. Fed Chairperson, Janet Yellen, in her semiannual testimony before Congress indicated that the Fed may not opt for any rate hike immediately. Dividend paying stocks suffer when rates are rising as investors focus on safe bonds.
However, highly rated bonds are generating little income in a low interest rate environment. Moreover, investors are already nervous after junk-rated debt registered its first loss last year since the financial crisis.
On the other hand, investors are leaning in for dividend-rich sectors like the utilities. In fact, Utilities Select Sector SPDR (XLU - Free Report) has gained nearly 6.5% on a year-to-date basis – the highest gain among all S&P 500 sectors this year.
February Economic Data Weak, Dismal Earnings Report
An uptick in personal consumption expenditure price index (PCE) was probably the most significant economic event of February. PCE showed an increase of 1.3% year over year, the highest gain since Oct 2014. However, manufacturing is still languishing. Manufacturing shrank for the fifth straight month in February and is still a big drag on the U.S. economy.
The ISM Manufacturing Index increased to 49.5% in February from 48.2% in January. But the reading was less than the 50% mark, which indicated that more companies are contracting rather than expanding their business. Consumer confidence also declined significantly for the month of February.
Additionally, the earnings picture is weakening significantly. We now have Q4 results from 490 S&P 500 companies; earnings for these companies are down 6.4% from the same period last year on 4.6% lower revenues. Moreover, for the current quarter, total earnings for the S&P 500 index are expected to be down 9.3% year over year. (Read: Earnings Picture Deteriorating)
5 Strong Buy S&P 500 Dividend Stocks for March
The S&P 500 posted losses for the third straight month in February for the first time since Sep 2011. However, the index posted its best one-day gain yesterday since Jan 29. This volatile movement is due to the roller coaster ride in oil prices, making investment in dividend stocks a lucrative option.
Investors are searching for some stability in their portfolios and are now focusing on companies that pay hefty dividends. Moreover, the possibility of a rate hike ebbing in the near term makes dividend paying stocks more tempting.
The S&P High Yield Dividend Aristocrats Index has gained 2.5% on a year-to-date basis, in contrast to the S&P 500 index declining 3.2%. Hence, it will be prudent to invest in dividend paying stocks from the S&P 500 index.
These stocks reflect a solid financial structure and healthy underlying fundamentals. They are also less taxed as compared to interest income, help your portfolio to grow at a compounded rate, offer protection from earnings manipulation and act as a hedge against inflation. Most importantly, such stocks when combined with a Zacks Rank #1 (Strong Buy) are expected to boost your returns. The favorable Zacks Rank should help these stocks to continue gaining this year as well.
Motorola Solutions, Inc. (MSI - Free Report) is engaged in providing communication equipment, software and services across the world including the U.S. The company was founded in 1928 and is headquartered in Schaumburg, IL. MSI carries a Zacks Rank #1 and offers a promising dividend yield of 2.23%.
Applied Materials, Inc. (AMAT - Free Report) provides manufacturing equipment, services and software to the semiconductor, display, solar photovoltaic and related industries worldwide. The company was founded in 1967 and is headquartered in Santa Clara, CA. AMAT carries a Zacks Rank #1 and offers an encouraging dividend yield of 2.12%.
Campbell Soup Co. (CPB - Free Report) along with its subsidiaries manufactures and markets convenience food products. The company was founded in 1869 and is headquartered in Camden, NJ. CPB carries a Zacks Rank #1 and offers a stable dividend yield of 2.02%.
Delta Air Lines, Inc. (DAL - Free Report) provides scheduled air transportation for passengers and cargo in the U.S. and internationally. The company was founded in 1924 and is headquartered in Atlanta, GA. DAL carries a Zacks Rank #1 and offers a steady dividend yield of 1.12%.
Tyson Foods, Inc. (TSN - Free Report) along with its subsidiaries operates as a food company worldwide. TSN operates through four segments including chicken, beef, pork and prepared foods. The company was founded in 1935 and is headquartered in Springdale, AR. TSN carries a Zacks Rank #1 and offers a stable dividend yield of 0.93%.
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