U.S. stock markets are in the grip of volatility once again. Wall Street suffered a bloody blow in the first half of 2022 recording the worst first half in more than 50 years. The tremors of record-high inflation and its aftershock in the form of an extremely hawkish Fed have shaken investors’ confidence to its nadir.
However, U.S. stock markets saw an impressive turnaround from mid-June to mid-August buoyed by an initial sign of a decline in the inflation rate, which prompted market participants to think that the Fed may reduce the magnitude of an interest rate hike from its September FOMC.
The rally halted in the second half of August on investors’ concern about the continuation of hawkish monetary policies by the central bank. The meltdown deepened on Aug 26, following a stern message from Fed Chairman Jerome Powell at the annual Jackson Hole Symposium.
Investors are highly worried about market’s behavior in September, which is historically the worst-performing month in Wall Street. The S&P 500 ended in the positive territory just 45% of the time in September since World War II.
At this stage, it will be prudent to invest in low-beta, high-dividend-paying stocks with a favorable Zacks Rank. Five such stocks are — Entergy Corp. ETR, Icahn Enterprises L.P. IEP, The Southern Co. SO, NiSource Inc. NI and National Retail Properties Inc. NNN.
Powell reiterated that the central bank would pursue aggressive interest rate hikes and tighter momentary control policies until inflation comes down to at least near its 2% target level. A marginal decline in the inflation rate has no meaningful implication for the Fed.
Market participants are expecting more softness in consumer spending and a decline in business spending due to a margin squeeze resulting in negative-to-moderate GDP growth. The Fed Chairman has also warned of some toughness going forward.
On Aug 30, New York Federal Reserve President John Williams told The Wall Street Journal that he also favors Fed Chair’s view of rigorous rate hiking to bring down the inflation rate, which is currently at a 40-year high.
The core PCE price index — Fed’s favorite gauge of inflation — came in at 4.6% year over year in July. Williams’ statement dashed market participants’ hope of a rate cut in 2023. CNBC said that Williams is a key member of the Fed’s current policy brain trust.
Per CME FedWatch, at present, 70.5% of market respondents are expecting 75 basis-point rate hikes in the September FOMC. Thereafter, there is a 64.4% probability of a rate hike of 50 basis points in the November FOMC and another 25 basis-point rise in the December FOMC.
The second-quarter 2022 earnings results were better-than-expected despite the margin squeeze. However, we are seeing a significant drop in earnings projection for the third quarter. As of Aug 26, our estimate has projected 1.8% growth in earnings per share, well below the 7.6% projected on Jun 1.
Why Choose Low-Beta High-Yielding Stocks?
At this stage, investment in low-beta stocks with a high dividend yield and a favorable Zacks Rank may be the best option. If the markets regain momentum, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the downtrend continues, low-beta stocks will minimize portfolio losses and dividend payment will act as a regular income stream.
Our Top Picks
We have narrowed our search to five large-cap (market capital > $10 billion) low-beta stocks with a solid dividend yield. These companies have strong growth potential for the rest of 2022 and have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Entergy has an investment plan in place to maintain utility support, and upgrade distribution and transmission. Such investment plans are expected to boost customer and industrial load growth that should drive the earnings of Entergy.
Over the next three years, ETR plans to invest $12 billion. Entergy is also making steady investments to boost its renewables portfolio. ETR plans to add more than 2,500 megawatts capacity by the end of 2025 and more than 5,000 MW of renewables by 2030.
Entergy has an expected earnings growth rate of 6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days. ETR has a current dividend yield of 3.38% and a beta of 0.58.
The Southern Co. is one of the largest electric utility holding companies in the United States, and the premier energy firm serving the attractive Southeast market. Positioned in a niche industry with high barriers to entry, SO’s less-volatile, recession-proof business model presents a unique opportunity to earn high returns.
Southern Co. has gradually increased its customer base, ieveraging the demographics of its operating territories. With good rate-based growth and constructive regulation, SO is expected to generate steady earnings and dividend growth in the coming years.
The Southern Co. has an expected earnings growth rate of 6.7% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 7 days. SO has a current dividend yield of 3.46% and a beta of 0.50.
NiSource expects to invest $40 billion in the long-term utility infrastructure modernization program. The existing capex plans will further enhance the reliability of natural gas and electric operations, and help the company offer efficient services to NI’s expanding customer base.
NiSource continues to increase its clean power assets. Moreover, nearly 75% of NI’s investment is recovered within 18 months through rate hikes, which provides necessary funds to carry on infrastructure upgrade projects.
NiSource has an expected earnings growth rate of 5.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 60 days. NI has a current dividend yield of 3.10% and a beta of 0.38.
Icahn Enterprises is a diversified holding company engaged in a variety of businesses. IEP operates in investment, energy, automotive, food packaging, real estate, home fashion, and pharma businesses in the United States and Internationally.
Icahn Enterprises has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 30 days. IEP has a current dividend yield of 15.48% and a beta of 0.80.
National Retail Properties is a real estate investment trust, which invests in single tenant net-leased retail properties throughout the United States. NNN maintains a conservatively managed, diversified real estate portfolio with properties subject to long-term, net leases with established tenants.
National Retail Properties has an expected earnings growth rate of 3.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the last 30 days. NNN has a current dividend yield of 4.79% and a beta of 0.84.
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