Dividend hunters: Ready your wallets.
With the U.S. 10-year Treasury yield falling to its lowest level since October 2017 amid rising trade tensions, six S&P 500 sectors now offer comparable or higher yields than the federally issued bond’s 2.32% return.
They are: the financials, with a 2.22% yield; the materials, with a 2.30% yield; the consumer staples, with a 2.91% yield; real estate investment trusts, with a 3.25% yield; utilities, with a 3.29% yield, and energy, at 3.78%.
But while the sector plays might look tempting, one expert recommends being more selective.
“Typically, if a company wants to pay a dividend, you need to have a solid balance sheet and strong cash flow, and those are the kinds of companies that do well when times get tough,” Mark Tepper, president and CEO of wealth management firm Strategic Wealth Partners, said Thursday on CNBC’s “Trading Nation.”
“So, of all the sectors, we like financials, but I still think you need to pick the winners, not the sector,” he said. “We’re seeing a lot of investors rotate into financials right now for value reasons and also for yield, but within financials, I think the key really is to identify the best companies.”
To do that, Tepper looks for healthy free cash flow, growth potential and dividend yield. Two particular stocks — both of which have bigger payouts than the 10-year Treasury — stood out to him.
“Look at the opportunity in a top-notch bank right now like J.P. Morgan. I mean, you’re looking at a 2.9% yield, it’s cheap, it’s trading at, like, 10 times forward earnings, and you’re getting the best management team in the business, ” Tepper said.
“Another one we like is Morgan Stanley, ” he said. “It’s about a 2.8% dividend. They’ve got incredible revenue diversification. They’ve got their wealth management business, which is all recurring revenues. They’ve got their investment banking fees, which are high-margin revenues, and that’s dirt-cheap, trading at a [price-to-earnings multiple] of eight.”
Mark Newton, president and founder of investment consulting firm Newton Advisors, took more of a top-level approach to these high-yield opportunities.
“I like consumer staples here,” he told CNBC in the same interview. “We’ve seen some outperformance in the defensive [plays] over the last couple weeks, and I think that continues at least into end-of-month.”
Newton said the Consumer Staples Select Sector SPDR Fund, or XLP, looked especially attractive on a technical basis, having climbed up to near its previous highs.
“When you take a look at relative charts, we’ve really started to accelerate higher when you look at XLP versus the S&P in recent weeks. So, that’s also one to favor near term,” he said. “I do think, though, that the overall sell-off in the market does prove short-lived, and one [where] you might want to consider things like health care.”
Newton’s thesis seemed to play out Friday as markets bounced back in early trading. Charting the Health Care Select Sector SPDR Fund, or XLV, he pointed to a few favorable trends that made him bullish.
“We’re actually seeing a decent breakout in relative terms of things like the XLV versus the S&P for the first time all year coming down from a very low base in this sector, which has underperformed,” Netwon said. “So, I’m a buyer of health care coming into this seasonally bullish time. June, July tends to be very, very good for this sector, and so that’s really one to look at for me.”
