Investors looking for stocks that can perform well amid a sustained market pullback should consider eight low-valuation, high-dividend stocks. Based on history since 1990, such value dividend stocks tend to be market leaders whether the macro environment is an economic slowdown, a full-blown recession, or a round of monetary easing by the Federal Reserve.

“The valuation and positioning problems that set the stage for this year’s pullbacks have not been fully resolved,” writes Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a new report summarized by Barron's. Based on equity valuations that are near record highs, and bearish signals from the equity futures market, she believes that stocks are vulnerable to bad news and that a selloff is likely. 

Among the stocks that passed RBC's screens are Halliburton Co. (HAL), Prudential Financial Inc. (PRU), and Valero Energy Corp. (VLO). These additional dividend paying stocks are top picks of RBC analysts based on value and quality criteria: Applied Materials Inc. (AMAT), Dow Inc. (DOW), Duke Energy Corp. (DUK), Energy Transfer LP (ET), and Targa Resources Corp. (TRGP).

Significance for Investors

Calavina's team studied how three categories of stocks performed since 1990 under each of the three economic scenarios listed above. These were value dividend, quality dividend, and dividend-paying quality growth. Value dividend performed best overall.

When the economy was slowing, as indicated by a declining ISM Manufacturing Index, the S&P 500 Index averaged a 4.4% gain, while value dividend stocks returned 6.4%. During recessions, the respective figures were losses of 12.7% and 4.6%. While the Fed was easing, the gains were 16% and 28.5%.

Stocks passing RBC's screens had forward P/E ratios and price to operating cash flow ratios in the lowest 33% of the S&P 500, but dividend yields in the top 50%. Their dividend payout ratios are sustainable, at under 100%. Finally, these stocks have outperform ratings from RBC.

Oil services company Halliburton has a forward P/E of almost 12 and yields 3.9%. RBC analyst Kurt Hallead calls it a “core holding for large-cap energy investors." Down by 28.5% year-to-date in 2019, based on adjusted closing prices, Hallead has a price target of $35, or 89% above the Oct. 4 close.

Insurance and diversified financial services company Prudential Financial has a forward P/E under 7, and yields 4.7%. Falling interest rates have made it a market laggard, with a 10.7% YTD gain, based on adjusted closing prices. RBC analyst Mark Dwelle indicates that Prudential’s variable annuity sales are increasing and that its global businesses combine to deliver a consistent ROE of about 15%. His $110 price target is almost 26% above the Oct. 4 close.

Valero is among the lowest cost petroleum refiners, per RBC analyst Brad Heffern, and has returned $11 billion to shareholders through share repurchases and dividends from 2015 to 2018. Valero has a forward P/E under 9 and yields 4.4%. Its shares are up by 16.5% YTD, on an adjusted close basis, and Heffern has a target of $98, for an additional gain of 16%.

Looking Ahead

Calvasina sees a rotation underway from growth to value stocks, based on ETF money flows and other trends, and expects this to continue regardless of whether the economy accelerates or decelerates. She observes that growth stocks have a projected rate of increase for earnings that is only slightly better than that for value stocks. Moreover, “growth looks expensive now, unlike the past decade when it has looked cheap," she finds.