Wall Street is reeling under the impact of the coronavirus outbreak despite the Fed’s emergency rate cut of 50 basis points. On Mar 3, the Fed fund rate was reduced to 1-1.25% from the prior range of 1.50-1.75%. Notably, this was the first unscheduled rate cut by the central bank since October 2008.
Despite the rate cut, investors rushed toward safe-haven sovereign government bonds, which resulted in historically low yields. Meanwhile, record-low Treasury yields are likely to help some stocks emerge as a lucrative alternative in this uncertain financial climate.
Fed Takes Strong Measure But Fails to Instill Optimism
The immediate response of market participants to the surprising 50 basis point rate cut by the Fed two weeks before its scheduled meeting during Mar 17-18, was disappointing. Wall Street remained extremely choppy with the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — tumbling 2.9%, 2.8% and 3%, respectively.
Despite reaffirming the stability of the U.S. economic fundamentals, Fed Chairman Jerome Powell said “we saw a risk to the outlook for the economy and chose to act.” However, Powell said that the Fed is unlikely to expand its balance sheet or intensify quantitative easing program through government bond purchase, much to the chagrin of investors.
Notably, a 50 basis point rate cut was already factored in the market price by investors. It seems that market participants were more interested regarding the Fed Chairman’s take on the current economic scenario and its plans to sustain the largest expansion. Notably, several industry experts are already asking for another 50 basis point cut in benchmark rate either this month or two cuts in March or April of a quarter percentage point each.
Treasury Yields Plunge
Following the Fed’s failed attempt to inspire confidence among investors on risky assets like equities, market participants continued their panicked rush to safe-haven U.S. Treasury Notes. As a result, the yield on the benchmark 10-Year US Treasury Note plunged below 1% level to 0.914% for the first time in history — finally settling at 1.005%.
Likewise, the yield on short term 2-Year US Treasury Note plummeted to 0.723% — its lowest since August 2016. The yield on the long term 30-Year US Treasury Note tumbled to a record-low 1.622%. Year to date, the yields on the 10 and 30 Year Treasury Notes have nosedived 90 and 75 basis points, respectively.
A Ray of Hope for Stocks
The record-low Treasury yields in fact fell below the average dividend yield of the S&P 500 index — popularly known as the stock market’s barometer. On Mar 3, the estimated dividend yield of the S&P 500 was 1.91%, well above the 2-Year, 10-Year and 30-Year Treasury Yields.
In their rush to transfer money to safe-haven government bonds from risky equities, market participants have shifted too much money to the bond market resulting in plunging yields. At this stage, any company, which has a history of paying out regular dividend, with higher dividend yield than the benchmark Treasury Notes, will be a more preferable asset for investors.
Our Top Picks
At this stage, investment in high-yielding, S&P 500 stocks that pay out regular dividend will be a prudent move. We narrowed down our search to six large-cap (market capital > 100 billion) stocks as these stocks have strong business model and long history of operation. Each of our pick has carry a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our six picks year to date.
International Business Machines Corp. IBM: The leading provider of advanced IT solutions, including computer systems, software, storage systems and microelectronics offers a current dividend yield of 4.82%. The company has an expected earnings growth rate of 4.3% for the current year. The stock price is 23.2% below its 52-week high recorded on Feb 6.
Broadcom Inc. AVGO: The premier designer, developer and global supplier of a broad range of semiconductor devices offers a current dividend yield of 4.56%. The company has an expected earnings growth rate of 8.8% for the current year (ending October 2020). The stock price is 20.9% below its 52-week high recorded on Jan 24.
The Coca-Cola Co. KO: The beverage company, which manufactures, markets and sells various nonalcoholic beverages worldwide offers a current dividend yield of 2.86%. The company has an expected earnings growth rate of 6.6% for the current year. The stock price is 7.3% below its 52-week high recorded on Feb 21.
The Procter & Gamble Co. PG: The leading provider branded consumer packaged goods in North and Latin America, Europe, the Asia Pacific, Greater China, India, the Middle East, and Africa offers a current dividend yield of 2.50%. The company has an expected earnings growth rate of 18.3% for the current year (ending June 2020). The stock price is 8.4% below its 52-week high recorded on Jan 24.
McDonald's Corp. MCD: The leading fast-food chain that currently operates roughly 38,000 restaurants in more than 100 countries offers a current dividend yield of 2.47%. The company has an expected earnings growth rate of 8.9% for the current year. The stock price is 11.2% below its 52-week high recorded on Aug 9, 2019.
Intel Corp. INTC: The leading provider of computing, networking, data storage and communication solutions worldwide offers a current dividend yield of 2.27%. The company has an expected earnings growth rate of 2.5% for the current year. The stock price is 23.8% below its 52-week high recorded on Jan 24.
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