The first half of the year has been splendid, with returns surpassing Wall Street estimates and being double of the average 4% gain since World War II, as per research firm CFRA. But, what could cap gains in the second half is an economy that’s not expanding fast enough, policy gridlock, a more hawkish Federal Reserve and stock prices that are stretched.
Given the widespread uncertainty, investing in companies that pay consistent dividends can make for wonderful investment choices. Such companies are financially stable and mature, and can even generate steady cash flow irrespective of market conditions.
Small Upside for Stocks in the Second Half
The Dow Jones and the S&P 500 gained around 8% in the first six months of the year, their best performance since 2013. The Nasdaq Composite Index carved its best first half of a year since 2009, rising 14.1%. Gains were driven by expectations that the Trump administration will deliver on the much-awaited policy changes, strong corporate earnings, more confident consumers and an upbeat labor market.
However, the stock market is expected to rise marginally in the second half of the year, with the S&P 500 projected to close the year at 2,460, just 1.1% above its Jul 5 close of 2,432.5, as per a Reuters poll. In fact, several poll participants projected a correction of at least 10% this year, something which the benchmark index hasn’t witnessed since the beginning of 2016.
It’s hard to imagine a second half as strong as the first. Economic growth in the U.S. is likely to disappoint in the second half as prospects of the much-anticipated Trump administration policies continue to dwindle. An overly aggressive Fed, pricier U.S. stocks and the cooling off of top-performing tech stocks raised concerns. Let us now take a look at the factors that are expected to plague the broader markets in the second half.
Economic Growth Worries Loom, Policy Gridlock
The International Monetary Fund (IMF) trimmed its projections for U.S. economic growth to 2.1% this year from 2.3%. The IMF curtailed its growth forecasts as it rejected Trump’s tax cut and fiscal spending plans. The outlook for Trump’s pro-growth policies is also clouded as he failed to get the stimulus agenda passed. Senate Republicans were compelled to delay the healthcare vote due to lack of support, with Trump’s administration seeing few legislative successes. Trump has repeatedly said that he wants to repeal and replace Obamacare before moving on to his other business-friendly policies.
Trump, in the meanwhile, is promising to increase U.S. economic growth to 3% a year during his first term. However, the IMF says that 3% goal is “an extremely optimistic growth assumption”. With the U.S. jobs market nearing full employment levels and slow gains in productivity, IMF believes it will be an uphill task to boost growth to 3%. IMF also warned that lower and middle class Americans will bear the brunt of Trump’s budget cuts in the near term.
Fed Rate Hike Fears
Last month, Fed hiked rates for the second time in three months. They also stuck to their plans of another hike this year and issued forecasts that showed three more quarter point rate increases next year, similar to the projection issued in March. At the same time, minutes of the June 13-14 Federal Open Market Committee meeting showed that “several” officials were in favor of paring back its $4 trillion-plus bond portfolio within a “couple of months” (read more: Fed Hikes Rate, Sets Asset Plan: 5 Top Gainers).
Such tightening measures without a considerable pickup in economic growth are concerns for investors. Both the moves mean fewer stimuli for the broader markets.
The market’s big gains in the first half have drove the S&P 500’s valuation. The benchmark index is trading at about 18 times its expected earnings over the next year, which is close to its priciest in over a decade. Double-digit gains among key internet stocks were mostly responsible for such big gains (read more: Silicon Valley Is Richer Than Ever: 4 Hot Tech Picks).
But, lofty valuations have raised a lot of question whether investors still have faith in the fast-growing tech sector. The tech-heavy Nasdaq, which is up more than 14% this year, has been trading below its Jun 8 record close, a clear indication that investors are hesitant to push the index higher. Moreover, as stocks are no longer cheap, it will take a stronger economic rebound to make them look attractive. But, as mentioned above, the latest IMF report has poured cold water on such prospects.
Play Safe with These 5 Dividend Stocks in the Second Half
Thanks to the aforementioned factors, the second half is certainly cast into uncertainty. This calls for investing in dividend paying stocks which boast immense financial strength and are immune to market vagaries. Such stocks reflect solid financial structure, healthy underlying fundamentals and better quality business. They have also raked in excellent risk-adjusted returns this year, while their large customer base, sustainable business model, long track of profitability and strong liquidity allow them to offer sizable yields on a regular basis, regardless of market direction.
We have, thus, selected five such dividend stocks that can provide income investors with plenty of upside along with their strong payouts. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of ‘A’ or ‘B’. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Artisan Partners Asset Management Inc (APAM - Free Report) is an investment management company. The company manages investments primarily through mutual funds and separate accounts. The company has a Zacks Rank #1 and VGM score of ‘A’. Artisan Partners Asset Management has a dividend yield of 7.75%, while its five-year average dividend yield is pegged at 7.38%. The company is likely to yield a return of 48.4% this year, higher than the Financial - Investment Management industry’s gain of 7.8%.
CenterPoint Energy, Inc. (CNP - Free Report) is a public utility holding company. The company, through its subsidiaries, owns and operates electric transmission and distribution facilities, and natural gas distribution facilities. The company has a Zacks Rank #2 and VGM score of ‘B’. CenterPoint Energy has a dividend yield of 3.88%, while its five-year average dividend yield is pegged at 6.53%. The company is likely to return 11.4% this year, more than the Utility - Electric Power industry’s gain of 3.5%.
Eversource Energy (ES - Free Report) is a utility holding company engaged in the energy delivery business. The company has a Zacks Rank #2 and VGM score of ‘B’. Eversource Energy has a dividend yield of 3.16%, while its five-year average dividend yield is pegged at 6.8%. The company is likely to yield a return of 6.7% this year, more than the Utility - Electric Power industry’s gain of 3.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lazard Ltd (LAZ - Free Report) is a financial advisory and asset management company. The company has a Zacks Rank #2 and VGM score of ‘B’. Lazard has a dividend yield of 3.5%, while its five-year average dividend yield is pegged at 16.1%. The company is likely to return 10% this year, better than the Financial - Investment Management industry’s gain of 7.8%.
Principal Financial Group Inc (PFG - Free Report) offers a range of financial products and services, including retirement, asset management and insurance. The company has a Zacks Rank #2 and VGM score of ‘B’. Principal Financial has a dividend yield of 2.86%, while its five-year average dividend yield is pegged at 18.35%. The company is likely to yield a return of 11.6% this year, higher than the Financial - Investment Management industry’s gain of 7.8%.
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