After the unanticipated lull in the summer, investors are expected to face greater bursts of volatility in October. While the upcoming presidential election is expected to heighten turbulence, Deutsche Bank AG’s (
DB - Free Report) inadequate capital cushion and the U.K.’s plan to exit the European Union will add to the woes.
Investors are already anxious about the high valuations, which put the broader market in a precarious situation often leading to corrections. This calls for investing in dividend paying stocks which boast tremendous financial strength and are resistant to market vagaries. Also, the slim chances of a rate hike anytime soon make these stocks tempting picks.
Election to Shoot Volatility
October traditionally sees a rise in volatility, especially when presidential election is just around the corner. The CBOE Volatility Index (VIX), a gauge of near-term investor anxiety, has always risen significantly in the past six presidential elections this month, except for 1996, when Bill Clinton handily won the re-elections. The following table shows how much VIX spiked in the months of October before elections:
Date Change in VIX
31 October 1992
31 October 1996
31 October 2000
29 October 2004
31 October 2008
31 October 2012
With the polls being close between the presidential candidates Hillary Clinton and Donald Trump, it is expected that the volatile period that has dominated September is here to stay. After the first presidential debate, Clinton held an edge over Trump, but the latter is still in the lead when some third-party contenders are taken into account. In spite of the striking differences, both the candidates are promoting policies based on larger infrastructure outlays (read more:
Portfolio Strategy for 2016 Presidential Election). Deutsche Bank Collapse in the Cards?
More uncertainty looms large this month, thanks to doubts over Germany’s Deutsche Bank’s ability to withstand the cost of any settlement with the U.S. Department of Justice. A research firm warned that the bank may tap shareholders for more cash in the wake of the $14 billion fine.
The bank needs to settle civil claims, which is related to the sale of structured mortgage bonds during the 2008-2009 financial crisis. German Chancellor Angela Merkel had said that she wouldn’t offer state aid to the bank. Merkel was in no mood to offer assistance as she was heading into an election year.
The German lender endured questions like whether it was losing the confidence of investors after a handful of hedge funds that clear derivatives through the bank withdrew excess cash and positions, according to a
Bloomberg report. Some of the funds that have moved part of their listed derivatives holdings to other firms included Izzy Englander’s $34 billion Millennium Partners, Chris Rokos’s $4 billion Rokos Capital Management, and the $14 billion Capula Investment Management. Brexit Worries Resurface
Concerns about Brexit reemerged. Britain’s Prime Minister Theresa May has set the country on course to leave the EU by 2019. She said that “we are going to be a fully independent, sovereign country — a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts”.
Investors, however, feared that such an outcome will destabilize the region’s economy, slow down global growth and create fresh bouts of gyration in the financial markets worldwide (read more:
Brexit Panic: 7 Ways to Trade the Vote). Stretched Valuations
The market is already in a perilous situation, as most analysts warn that stock market valuations are at elevated levels. This makes the market more vulnerable to a volatile sell-off. The S&P 500’s forward 12-month P/E ratio is currently at around 16.6, way above the 5-year average of over 14.8.
It is also worth noting that earnings are not just lackluster, they are negative. Total earnings for the S&P 500 index are currently expected to be down 2.8% in the third quarter from the same quarter last year (read more:
Q3 Earnings Season Preview). 5 Rock-Solid Dividend Stocks to Buy Now
Thanks to the aforementioned factors, the future is cast into uncertainty. Hence, it will be prudent to invest in dividend paying stocks. Dividend is mostly paid by companies that boast solid financial structure and healthy underlying fundamentals, and are unperturbed by market turbulence.
For the time being, the Fed has also refrained from raising rates. If September jobs data turn out to be mediocre like in August, it might further reduce the possibility of a rate hike. Diminishing chances of a rate hike led to increase in bond prices, while yields on such bonds decline. This in turn is a positive for dividend paying companies (read more:
Fed Holds Off Rate Hike for Now: Top 5 Gainers).
Additionally, such stocks when combined with a Zacks Rank #1 (Strong Buy) or # 2 (Buy) and a
VGM score of ‘A’ or ‘B’ are sure to boost your returns. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Macy’s, Inc. ( M - Free Report) operates stores, websites, and mobile applications. Macy’s has a Zacks Rank #2 and a VGM score of ‘A’. The company has a dividend yield of 4.08%. Macy’s 5-year historical dividend growth rate is 30%. L Brands, Inc. ( LB - Free Report) operates as a specialty retailer of women’s intimate and other apparel and personal care products. L Brands has a Zacks Rank #2 and a VGM score of ‘A’. The company has a dividend yield of 3.39%. L Brands’ 5-year historical dividend growth rate is 24.5%. DTE Energy Company ( DTE - Free Report) engages in the utility operations. The company has a Zacks Rank #2 and a VGM score of ‘B’. DTE Energy has a dividend yield of 3.29% and a 5-year historical dividend growth rate is 5.3%. Packaging Corporation of America ( PKG - Free Report) manufactures and sells containerboard and corrugated packaging products. Packaging Corporation of America has a dividend yield of 3.1% and a 5-year historical dividend growth rate of 26.1%. The company has a VGM score of ‘B’ and a Zacks Rank #1. You can see . the complete list of today’s Zacks #1 Rank stocks here Xerox Corporation ( XRX - Free Report) provides business process and document management solutions. Xerox has a Zacks Rank #2 and a VGM score of ‘A’. The company has a dividend yield of 3.06%. Xerox’s 5-year historical dividend growth rate is 15.2%. VIDEO Now See Our Private Investment Ideas
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