Over the past two months, investors have been reminded of a valuable lesson: stocks can also go down. Both the Dow Jones Industrial Average and broad-based S&P 500 are firmly in correction territory — i.e., at least 10% below recent highs — and have logged some of their biggest single-day point losses in history.
Market got you down? Consider dividend stocks.
Yet investing strategies to weather a downturn in the stock market do exist. Among the most successful of those strategies is the idea of purchasing high-quality dividend stocks.
Dividend-paying companies offer three primary advantages to investors. First, they act as a beacon of profitability. In other words, no company would continue to share a percentage of its profits with investors if its board of directors didn’t foresee continued growth and/or profitability. Second, the dividends received act somewhat as a hedge against the downside that investors can experience during corrections and bear markets.
Finally, dividends can be reinvested back into more shares of dividend-paying stock to accelerate wealth creation. You may be able to do this directly through your broker or use a Dividend Reinvestment Plan, or DRIP. This is how money managers build wealth for their clients.
In a perfect world, investors want the most income possible from dividends with the least amount of risk. Of course, a high dividend yield isn’t necessarily a good sign. Since yield is a function of share price, a rapidly falling stock or a company whose business model is in trouble could lure in unsuspecting income investors. Finding high-quality high-yield dividend stocks takes a lot of digging and due diligence — but the rewards could be great.
These high-yield stocks don’t care about the stock market correction
Since the stock market hit an all-time high in late January, the following three high-yield dividend stocks have bucked the recent correction and pushed higher.
It shouldn’t come as a surprise to investors that one of the best-performing high-yield stocks during this correction is a large drug developer: GlaxoSmithKline (NYSE:GSK). Even though healthcare stocks may have a tendency to move in step with the market, they’re usually inelastic. We can’t choose when we get sick or what ailment we develop, which creates a steady stream of revenue opportunities for pharmaceutical and biotech companies.
GlaxoSmithKline, which sports a delectable 7% yield, appears to have benefited tremendously from the announcement last week that it was buying out Novartis‘ stake in its consumer health joint venture, for $13 billion. The deal is expected to be accretive to its 2018 earnings, as well as improve cash flow generation. More importantly, GlaxoSmithKline chose to deploy its cash internally rather than chasing Pfizer‘s pricy over-the-counter business. Long story short, Wall Street and investors appear to approve.
Department store Macy’s (NYSE:M) might have been compared to a dinosaur in 2017, but it and its 5.3% yield have found new life this year.
Macy’s management understands the need to cut costs and transform its business in order to compete with e-commerce retail giants, and its fourth-quarter results, released in February, showed just that. A 1.3% increase in same-store sales during the fourth quarter was well above expectations, while its same-store-sales growth forecast of 0% to 1% for 2018 was a notable surprise, indicative of the company’s focus on getting the right merchandise in its department stores.
More recently, Macy’s has benefited from rumors that Donald Trump may go after online kingpin Amazon.com, which the president doesn’t believe pays enough in taxes. With Amazon representing a major speed bump in Macy’s turnaround, anything that would slow its growth would be viewed as a positive. At just nine times its forward earnings, Macy’s may still be on the sale rack.
A select few high-yield technology companies have bucked the stock market correction. Seagate Technology (NASDAQ:STX), which currently sports a 4.3% yield, has galloped higher following strong second-quarter results amid growing data-storage demand. In particular, Seagate notes that the average capacity per hard-disk drive shipped during Q2 2018 rose from 1.7 terabytes to 2.2 terabytes. This increased capacity helped lower Seagate’s operating expenses while meeting the growing demands of enterprise data centers.
Seagate also is making inroads in the sold-state-drive market. As noted by my Foolish colleague Keith Speights, Seagate forged a long-term supply agreement for NAND flash memory chips with Toshiba in October 2017 that can be used in solid-state drives, hard-disk drives, or hybrid solutions. Assuming Seagate’s dividend is sustainable — its payout ratio is above 80% — it could be quite the bargain.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.
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