We all know of the common dictate “sell in May and go away” until investors return to the markets in November. This makes August – an intervening period in this lull phase – a month of historical lows for the stock market. True to this belief, the month started on a downbeat note, thanks to a slump in oil prices and weak manufacturing report. What makes the future look all the more uncertain this year is the presidential election.
Corporate earnings also portray a disappointing picture with Q2 on track to be the fifth in a row to suffer an earnings decline for the S&P 500 index. Analysts at The Goldman Sachs Group, Inc GS had dropped their rating on U.S. stocks to “underweight” for the next three months, citing the need for better economic outlook (read: Goldman Sachs: Avoid stocks for next 3 months).
In search of some stability in their portfolios, investors are now focusing on companies that pay juicy dividends. And to top it, the stalemate in interest rate hikes has made dividend paying stocks more appealing.
Oil Enters Bear Territory
Heading into August, stocks lost momentum as crude oil returned to bear market territory, raising once again the specter of all the headwinds that tormented energy companies for a considerable period of time. Too much oil and subdued demand was primarily responsible for dragging down oil prices. WTI crude oil closed at $40.06 a barrel yesterday, down around 22% from its peak of $51.23 a barrel touched in early June. A drop of at least 20% from a recent peak, more or less signifies a bear market (read: What is a 'Bear Market'?).
The energy sector is already the worst-performing sector so far this earnings season. As of Jul 29, total earnings of energy companies are down a whopping 76.5% from the same period last year on 24.6% lower revenues. This latest slide is expected to make things even harder for energy companies, at least in the third quarter (read: Q2 Earnings Trends Already Established).
Economic Data Insipid
Weaker-than-expected manufacturing data also raised doubts about the strength of the economy. The index of manufacturing activity fell to 52.6 in July from 53.2 in June, signaling a slowdown in overall growth. Also, the U.S. economy grew at a slower–than-expected pace in the second quarter. According to the “advance” estimate by the Bureau of Economic Analysis, the second quarter output of goods and services increased at an annual rate of 1.2%, which was lower than the consensus estimate of 2.6% growth.
Deutsche Bank AG’s DB analysts believe that the U.S. economy is trapped in secular stagnation. If the Fed hikes rates in September despite the discouraging GDP numbers, then they are making a “big policy error” believes these analysts (read: Deutsche Bank Says U.S. GDP Flop Is a Sign of Secular Stagnation).
No Imminent Rate Hike
The Fed is expected to continue to exercise patience unless and until it gets a clear indication that the U.S. economy is on a firm, sustainable footing. For the Fed to hike rates, all data has to be uniformly strong. However, the aforementioned economic reports have put an imminent rate hike on the back burner. The Fed's preferred inflation gauge, the Personal Consumption Expenditure Index, also remained below its 2% target.
The Fed had already abstained from raising rates last month. Moreover, the latter part of the year into which we are headed should be fraught with volatility given the upcoming elections. Against this backdrop, the possibility of a rate hike looks very slim (read: 4 Utility Stocks to Play as Fed Keeps Rate Hike on Hold).
Market Turbulence Could Intensify
Analysts expect volatility to aggravate in the light of the U.S. presidential election in November. While Hilary Clinton was officially nominated last week as the Democratic candidate for president, the Republican nomination was secured by Donald Trump earlier in July.
This month also marks the one-year anniversary of the devaluation of the Chinese yuan, which had sent the major indexes lower. China is very much at the top of investors’ concerns as they fret about whether the country will repeat what they did to their currency a year back.
August has also traditionally been the worst month for both the Dow and the S&P 500, with the indexes declining at an average of 1.3% and 1%, respectively, from 1988 to 2015, according to the Stock Trader’s Almanac.
5 Best Dividend Stocks for August
Despite the enveloping pessimism, investing in dividend paying stocks should be a prudent move. This is because such stocks reflect a solid financial structure and healthy underlying fundamentals, and are unperturbed by market turbulence and economic uncertainty.
Additionally, the possibility of a rate hike ebbing in the near term makes dividend paying stocks more tempting. Conversely, investments in the bond market that tends to benefit from a rise in interest rates have lost its lure (read: The Advantages of Dividend Stocks).
Here we have selected five such dividend-paying stocks that have a Zacks Rank #2 (Buy) and a dividend yield of over 3%. The favorable Zacks Rank should help these stocks to continue gaining this year as well.
Omega Healthcare Investors Inc. OHI is a real estate investment firm. The company is based in Maryland, U.S. OHI has a dividend yield of 6.9%. OHI’s 5-year historical dividend growth rate is 3.6%.
Buckeye Partners, L.P. owns and operates liquid petroleum products pipeline systems in the U.S. The company is based in Houston, TX. BPL has a dividend yield of 6.7%. BPL’s 5-year historical dividend growth rate is 3.6%.
Macy's, Inc. M operates stores, websites and mobile applications in the U.S. The company is based in Cincinnati, OH. Macy’s has a dividend yield of 4.2%. The company’s 5-year historical dividend growth rate is 30%.
QUALCOMM Incorporated QCOM develops, manufactures and markets digital communications products and services in the U.S. and internationally. The company is headquartered in San Diego. QCOM has a dividend yield of 3.4%. QCOM’s 5-year historical dividend growth rate is 22.8%.
Principal Financial Group Inc. PFG provides retirement, asset management, and insurance products and services to businesses, individuals and institutional clients worldwide. The company is based in Des Moines, IO. PFG has a dividend yield of 3.4%. PFG’s 5-year historical dividend growth rate is 23.6%.
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