North Korea testing its deadliest ballistic missile sent shockwaves through Wall Street, while drawing widespread rebuke from across the globe. As the U.S. Congress returns from its summer recess on Sep 5, the chances of a possible showdown with Silicon Valley and government shutdown are high.
Investors are already dealing with the devastating effects of Hurricane Harvey on the stock market. Add to this an overwhelming majority of fund managers seeing U.S. market as the most overvalued, and then a market correction seems inevitable in the near term. Also, September has typically recorded dismal stock returns over the past two decades.
With the month expected to be rough, investing in sound dividend paying stocks seems judicious. Such stocks provide higher total returns with lower volatility, which are undoubtedly the ‘holy grail’ of investing.
Markets Cautious After North Korea Nuclear Test
The situation with North Korea continues to be tense and uncertain. The nation conducted its largest nuclear test on Sep 4, when the U.S. markets observed Labor Day holiday. Pyongyang is also preparing to launch another intercontinental ballistic missile.
The United States warned that countries trading with North Korea were adding fuel to its “dangerous nuclear intentions”. At the United Nations Security Council meeting, U.S. Ambassador Nikki Haley said that North Korea’s Kim Jong Un was “begging for war.” He requested all the council members to levy tough new sanctions on the rogue nation. South Korea, in the meanwhile, is in talks with Washington to deploy aircraft carriers and strategic bombers to the Korean peninsula. South Korea conducted long-range air-to-surface and ballistic missiles following North Korea’s nuclear test.
Mmain U.S. stock index futures took a beating on Sep 4, with the Dow briefly trading as low as 103 points, as per Fact Set data. The S&P 500 and Nasdaq-100 futures also slipped to close in the negative territory.
Tension in Silicon Valley, Possibilities of Government Shutdown Loom
On the domestic front, President Trump intends to end Obama’s deferred action for childhood arrivals program. Almost 800,000 so-called Dreamers are staying in the United States on a renewable work permit. Silicon Valley, which has fiercely defended immigration programs, is now expected to face a heavy blow. CEOs of major tech players are urging Trump to reconsider his opinion. Trump’s recent policies have already put him at logger heads with the tech community. Needless to say, last month, tensions sparked between Washington and Silicon Valley following the President’s remarks on the violence in Charlottesville, VA.
Anxiety has already gripped the Wall Street over the debate to raise the federal government’s debt ceiling, which has frayed relations between President Trump and the Republican leadership. With the disconnect growing, the chances that the government will shut down is 50/50, says Goldman Sachs Group Inc (GS - Free Report) . In fact, such a shutdown will result in the holdup of all non-emergency government funding such as worker furloughs, closing of public offices, shutdown of national parks and interruptions in implementation of pro-business policies.
Harvey & Its Impact
Hurricane Harvey, in the meanwhile, lashed the Texas coast in recent days. The storm originated from a tropical depression which rapidly ballooned from a Category 1 hurricane to Category 4. It worsened due to a lethal confluence of meteorological events. While it is too early to gauge the financial impact of the hurricane, some experts are calling for losses in the double-digit billions.
Investors saw insurance stocks take a hit as its ill effects mounted adding to a dour tone to match the human miseries. Investors were told that one-third of all U.S. refineries are located in the Houston area, which was also severely affected.
Are U.S. Stocks Overvalued?
As if all of that wasn’t enough, a record number of fund managers see the U.S. market as the most overvalued in the world. Among the 20 valuation metrics tracked by Ned Davis Research, 16 of them indicate U.S. stocks are extremely overvalued.
Stocks’ current cyclically-adjusted price-earnings ratio has only been exceeded in 1929 and 2000 – both prior to major corrections. In 1929, Wall Street was subjected to an infamous crash, while 2000 saw the dotcom implosion. This time around, expansion in profit margins led to loft valuations, which raises concerns of a possible downturn.
Talking about pullbacks, Stock Trader’s Almanac found out that in September, since 1950, the S&P 500 and the Dow averaged a loss of 0.5% and 0.8%, respectively. The Nasdaq Composite, as incepted in 1971, averaged a loss of 0.5%, as did the Russell 2000 of small-cap stocks since it was started in 1979.
5 Dividend Stocks to Counter the Worst Month
With so many concerns plaguing investors’ minds, dividend paying stocks are tempting options at the moment. The best dividend stocks pay out a healthy yield and have strong prospects, and are less susceptible to market downturns. 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.
While finding companies that offer these traits isn’t easy, they certainly do exist. To help you find these businesses, we have selected five dividend payers who have 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.
Caterpillar Inc. (CAT - Free Report) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company has a Zacks Rank #1 and a VGM Score of B. Caterpillar has a dividend yield of 2.66%, while its five-year average dividend yield is pegged at 10.5%.
The company’s current-year earnings rose 26.1% over the last 60 days. The company has outperformed the industry in the year-to-date period (+27.5% vs +16.2%).
Principal Financial Group Inc (PFG - Free Report) is an investment management company. The company offers a range of financial products and services, including retirement, asset management and insurance. Principal Financial has a Zacks Rank #2 and a VGM Score of B. It offers a dividend yield of 3%, while its five-year average dividend yield stands at 18.4%.
The company’s current-year earnings increased 2.2% over the last 60 days. The company has outperformed the industry in the year-to-date period (+9.4% vs +8.3%).
First American Financial Corp (FAF - Free Report) is engaged in the business of providing financial services. The company operates through the title insurance and services segment, and specialty insurance segment. First American Financial has a Zacks Rank #1 and a VGM Score of A. The company has a dividend yield of 2.77%, while its five-year average dividend yield is pegged at 33.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company’s current-year earnings rose 9.2% over the last 60 days. The company has outperformed the industry in the year-to-date period (+33.6% vs +9.5%).
Gap Inc (GPS - Free Report) is an apparel retail company. It offers apparel, accessories and personal care products for men, women and children under the Gap, Banana Republic, Old Navy, Athleta and Intermix brands. Gap has a Zacks Rank #2 and a VGM Score of A. The company has a dividend yield of 3.89%, while its five-year average dividend yield is pegged at 14.1%.
The company’s current-year earnings improved 3% over the last 60 days. The company, which is part of the Retail - Apparel and Shoes industry, has also given a solid return of 8.1% in the year-to-date period.
TELUS Corporation (TU - Free Report) is a telecommunications company. The company provides a range of telecommunications services and products, including wireless and wireline voice and data. TELUS has a Zacks Rank #1 and a VGM Score of B. The company has a dividend yield of 4%, while its five-year average dividend yield is pegged at 2.5%.
The company’s current-year earnings advanced 5.5% over the last 60 days. The company has outperformed the industry in the year-to-date period (+14.1% vs +8.6%).
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