While the rapid market rally may make some investors uncomfortable, there’s growing evidence that these recent gains have staying power.
Bank of America strategists recently noted that their firm’s US regime indicator rose in January for the first time in four months, even though stocks have rallied since late October. Another reading would confirm a formal recovery, though investors haven’t waited for the official word.
Bank of America
Signs of the recovery include strengthening earnings revisions and GDP forecasts as well as higher leading economic indicators and the stability of the 10-year US Treasury’s yield. Only inflation and high-yield treasury spreads were a cause for concern last month, the BofA strategists found.
Recoveries tend to last for about eight months but can range from three to 14 months, the strategists wrote. In this backdrop, lower-quality investments like value stocks and small caps tend to fare best, according to Bank of America. Sure enough, the firm found that value names have bested the typical stock in the last three months, though smaller firms have fallen short.
25 stocks with solid dividends
Dividend-paying stocks are also usually among the best assets to own during recoveries, according to Bank of America. In fact, strategists said firms that are especially generous when returning cash to shareholders lead the market higher in 88% of recoveries.
Regardless of the economic backdrop, BofA strategists think dividends will be a bigger driver for total returns in the coming years. Cash yields dropped last decade, meaning that stocks were powered by earnings multiple expansion and, to a lesser extent, profit growth, the firm noted.
Bank of America
Another catalyst for high-yielding stocks is that they’re relatively cheap on a valuation basis since they’re being neglected by active fund managers.
Bank of America
But instead of simply chasing companies with large yields, investors should prioritize shares of financially healthy firms with sizable dividend payouts and the ability to deliver on those pledges.
“We advise investors to seek out companies with above-market and secure (not stretched) dividend yields,” BofA strategists wrote in the note.
Bank of America shared a list of 134 stocks with trailing dividend yields in the second quintile of the Russell 1000 index. The firm didn’t issue buy recommendations for these names but instead called them a “first-pass screen” for those looking for firms with solid, sustainable dividends.
Business Insider then narrowed the list by examining each company’s valuation and comparing it to that of the Russell 1000, which has a price-to-earnings (P/E) ratio of 22.7x.
Below are the 25 stocks in the second quintile of trailing dividend yield that are trading at a 50% discount or greater to the Russell 1000 index, starting with the highest yielders. Along with each is its ticker, market capitalization, P/E ratio, and dividend yield for each.