As the Fed weighs even steeper rate cuts to bolster a faltering economy, a handful of stocks are poised to outperform, according to several market watchers. As lower rates reduce bond yields, these stocks that are likely to grow as the economy slows also boast healthy dividends and dividend growth history. The list includes Illinois Tool Works (ITW), Nucor (NUE), Pentair (PNR), W.W. Grainger (GWW) and Johnson & Johnson (JNJ), as outlined in a recent Barron’s report.
These companies, members of the “Dividend Aristocrats,” have all upped their dividend for at least 25 years straight, and are likely to continue with increases. Nick Getaz, a fund manager at Franklin Rising Dividends fund, indicates that this consistent dividend growth is an “indicator of a very strong business model and typically a resilient one.”
This week, Federal Reserve Bank of St. Louis President James Bullard said that the U.S. economy faces a number of "downside risks" that could require a further "insurance" move from policy makers, per The Wall Street Journal. In times of a slowing economy or recession, Barron’s recommends sticking to stocks whose dividends are relatively safe, as opposed to chasing high-yielding stocks, whose dividends could be vulnerable to cuts.
Leading the “Dividend Aristocrats,” Nucor has a dividend yield of 3.2%, followed by Illinois Tool Works and Johnson & Johnson, at 2.8%, and Pentair, and W.W. Grainger, both at 2.0%.
Getaz likes Johnson & Johnson in particular, calling it a “high quality, diversified health-care name.”
U.S. Stocks Beat Foreign in Downturns
Sophie Huynh, a cross asset strategist at Societe Generale, forecasts a recession and a bear market for U.S. stocks within one years’ time, per Business Insider. She says U.S. stocks generally beat international stocks when rates fall, and that high-yield stocks are especially well positioned to lead in down markets, given their rich dividends support their valuations. She also recommends buying the dividend aristocrats, which she expects to lead with a recession looming.
To be sure, income investors should still hedge their bets. As the trade war remains unsettled and volatility is expected to remain high though year-end, more factor rotations are expected over the coming months, per Dennis DeBusschere, macro research analyst at Evercore ISI, as cited by Barron's. High exposure to the value factor could leave dividend-focused strategies at risk, he added. DeBusschere recommends looking beyond dividend payers' cheaper valuation, and considering factors such as growth outlook and price momentum.