In the seemingly never-ending debate of "growth" versus "value" stocks, both side are always looking for solid evidence to support their penchant.
Barron's explains that "growth stocks are most simply defined as those that are expected to increase their earnings or revenues at a faster rate than the rest of the market. Value stocks are those that trade at a discount to the market on various fundamental measures."
Up until just recently, cheap value stocks had underperformed more expensive growth stocks for a long, long time, Barron's said.
However, amid the turmoil of the coronaviurs pandemic, some bruised value stocks look like they have the staying power to produce above-average returns in an economic recovery.
Barron’s recently went on the prolw for beaten-up value stocks with dividend yields exceeding 5%. A high dividend yield can be a sign of trouble, but the financial publication also explained that it looked for companies that covered all their fixed expenses by more than two times, which it considered an appropriate amount of safety.
Barron’s suggested 13 stocks:
- CenturyLink (CTL),
- Unum (UNM),
- Westrock (WRK),
- AT&T (T),
- LyondellBasell (LYB),
- PPL (PPL),
- Principal Financial (PFG),
- Xerox (XRX),
- HP (HPQ),
- MetLife (MET),
- Tyson Foods (TSN),
- Hewlett Packard Enterprise (HPE)
- Omnicom (OMC).
"The group is down 24% year to date and trades for less than nine times estimated 2021 earnings," Barron's explained, with the average dividend yield of almost 6%. "But importantly, the average fixed charge coverage ratio—roughly calculated as operating earnings divided by interest, rent and preferred dividends—is more than four times, excluding the insurance companies that can skew calculations. That’s pretty good," Barron's explained.
However, the lingering uncertainty has put future investor payouts in doubt in the short time the COVID-19 pandemic has upended all aspects of normal, daily life.
Goldman Sachs’s dividend is most at risk in Morgan Stanley’s worst-case look at whether big banks are likely to slash payouts as regulators around the world push lenders to preserve capital during the unfolding pandemic crisis, Bloomberg reported.
Goldman doesn’t have “much wiggle room to absorb a doubling of credit losses that we estimate in our bear case,” analysts led by Betsy Graseck wrote in a note, as the bank’s “regulatory capital is pretty much sitting on top of its required minimums” under new rules set to take effect in October 2020.
Concern about banking regulators and Congress targeting dividends started to surface in March, when many big U.S. banks voluntarily halted share buybacks as part of an effort to conserve capital and bolster lending to clients hurt by the pandemic and as European lenders suspended dividend payments. Plus, U.S. politicians from both parties may be hoping to score points against Wall Street, which is worried it’s destined to be cast as a villain.
Elsewhere, O’Shares ETFs chairman and “Shark Tank” investor Kevin O’Leary recently said that if you’re worried about dividend cuts, it’s "time to use actively managed ETFs."
The latest bout of market volatility could be the best reason yet for investors to consider backing the strategy, O’Leary told CNBC.
“It’s actually doing its work very well because in the case of OUSA,” the O’Shares FTSE U.S. Quality Dividend ETF, “that’s 130-plus of the S&P, but the highest-quality balance sheets, which generally speaking are higher and more unlikely to cut dividends,” O’Leary said.
“So, if you’re using OUSA as a dividend play, which many people are doing right now with [a] north of 3% dividend yield, it’s a very good place to hide in the weeds,” he said.
OUSA, O’Shares’ oldest ETF, says it invests in stocks that “meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds.” It is down 12.5% year to date.
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