When volatility strikes, dividends offer a natural respite. And there has been no shortage of volatility in the markets recently. From the rate cut selloff at the start of August, to the rising trade tensions, it’s not surprising that The Cboe Volatility Index (VIX) aka the 'fear gauge' surged to its highest levels this year on Monday.
“The waters appear to be as opaque now as they were in the fall of 2015 when China hard-landing fears defined global risk markets (if for different types of reasons),’’ Michael Purves, CEO of Tallbacken Capital Advisors LLC, wrote to clients. “Accordingly, dip buying will be tricky in the near term, and we expect volatility will be elevated, until valuation resets handsomely (such as it did in December).’’
In the meantime, dividend stocks can offer steady returns- and tend to be less volatile to boot. As Morgan Stanley private wealth adviser Christopher Poch writes: “Not only do dividend stocks as a group have less volatility year- to- year, they outperform non dividend paying stocks over time as well… Over the last 90+ years, dividends have accounted for more than 40% of the total return equation.”
With this in mind we pinpointed three dividend stocks that all share a ‘Strong Buy’ Street consensus right now. This is based on all the analyst ratings received by each stock over the last three months. Let’s take a closer look now:
General Motors (GM)
True, auto giant General Motors didn’t increase its payout last year- but I would argue that the stock is still something of a dividend darling. First its yield currently stands at 3.89%. That easily beats the consumer goods average of 2.01%. Right now, the yield translates into an annualized payout of $1.52 (paid quarterly).
And the Street also has a notably bullish outlook on GM. Out of six analysts polled in the last three months, five rate GM a buy- resulting in the stock's ‘Strong Buy’ consensus. Meanwhile the $53 average analyst price target translates into upside potential of 37%- not bad for a stock that has already gained 17% year-to-date.
Strong momentum is developing for GM, cheered Barclays analyst Brian Johnson on August 2. Truck pricing offsets China weakness - time for more respect, the analyst told investors post-earnings. Impressively, GM delivered a solid quarter (and one without the typical quibbles), reaffirmed what once seemed like an overly aggressive full-year guide, and was mildly rewarded by the market before the afternoon tariff-driven dip.
Luckily, Johnson believes that GM has little tariff exposure in its COGS [cost of goods sold], writing that “even with a softer China 2H, we have greater confidence in the flow-through of cost saves and truck earnings power into 2020.” As a result he has now boosted his earnings forecast for 2020E to $7,03.
“While some of the most bullish clients we talk to are already at $8, we think getting there would require some combination of a flat/up SAAR [the seasonal adjusted annual rate of sales], extended pricing strength and a sharper China recovery - none of which we are comfortable with at this point” said Johnson.
CVS Health (CVS)
Pharmacy giant CVS boasts a generous 3.7% dividend yield, vs the services average of just 2.16%. That means investors receive an annualized payout (paid quarterly) of $2. Although the stock has disappointed with its year-to-date performance, CVS is ripe for a rebound say analysts.
The stock has a ‘Strong Buy’ Street consensus, with 4 out of 5 analysts currently bullish on the stock. Their average price target of $67 also suggests upside potential of 24% from current levels. One five-star analyst who has recently given CVS his seal of approval is Tigress Financial’s Ivan Feinseth. He notes that CVS continues to experience strong pharmacy services growth thanks to its specialty services strength.
But what's getting Feinseth most excited is the massive $69 billion CVS-Aetna deal which he believes could create a new paradigm of healthcare service providers. The deal is still undergoing regulatory scrutiny- even though CVS is now operating and reporting results to Wall Street with Aetna included.
“The CVS/Aetna merger combines one of the world’s largest payers of healthcare services with one of the world’s largest providers of healthcare products and services, and best positions it to benefit as consumers have more control over their healthcare choices” writes Feinseth.
According to the analyst, the combined company will be better positioned to capitalize on the healthcare industry’s changing dynamics, including new reimbursement models and the shift to value-based healthcare services. Bottom line: " We believe significant upside exists in the shares and continue to recommend purchase."
Royal Caribbean (RCL)
Cruise line operator Royal Caribbean has grown its dividend in each of the last seven years. This means it now offers a 2.62% dividend yield, beating the services average of 2.16%. Investors receive a $2.80 annualized payout, paid quarterly.
Plus all six analysts covering RCL are bullish on the stock. So no hold or sell ratings here. These six analysts have an average price target of $145 (35% upside potential). Late last month, Deutsche Bank’s Chis Woronka stuck to his buy rating and $138 target price following a solid earnings report. “In our view, RCL management did everything it possibly could--outside of providing formal guidance--to convey that the bookings pace for 2020 remains strong, driven by pricing that is "up nicely" in all future quarters” Woronka wrote on July 25.
Although the stock price ‘refused to co-operate’ the analyst has yet to become disheartened. He told investors that while “fully acknowledging that sentiment and charts can be tough beasts to defeat, we remain buyers of RCL here.”
“Simplistically, we believe RCL delivered for bulls by 1) beating initial 2Q guidance (yields and EPS), despite a modest hit from the Cuba ban; 2) reducing full year 2019 EPS guidance by less than the amount of the initial estimate, even adjusting for the 2Q beat; and 3) providing favorable commentary in the press release” the analyst commented.