High-Yield Equity Plays Hit Highs in Defensive Rotation

Shares of Kellogg Company (K) and The Procter & Gamble Company (PG) are trading at 52-week highs while The Kraft Heinz Company (KHC) is pulling back after second quarter earnings releases, at the cusp of a notable rotation from growth stocks into high-yield plays. This morning's horrific second quarter GDP number could super-charge this phenomenon because these issues are classic defensive plays that tend to outperform during recessions and economic downturns.

Hundreds of equities now boast higher yields than the 10-Year Treasury Note, forcing income-minded investors to abandon the bond market and scoop up shares of companies with durable dividend paying histories. However, caution is needed to pick the right plays because distressed companies routinely offer big payouts to attract investment. These can work well in some situations, but they carry excessive risk that includes much lower prices and bankruptcy filings. 

Keep in mind that dividend yields drop as these equities gain ground, reducing obvious trading advantages. Beaten-down stocks with well-documented turnaround strategies often provide the most prolific returns in the high-yield group, at least in the early stages, with former laggards Kellogg and Kraft now rewarding investors after exiting long-term downtrends. (For a recent analysis, see: Kraft Heinz Stock Could Reward Long-Term Shareholders.)

Kellogg stock topped out in the upper $50s in 2007 and sold off to the mid-$30s in 2009. It bounced back to the prior high in 2011 and broke out in 2013, entering a strong but brief uptrend that posted an all-time high at $87.16 in the summer of 2016. Aggressive sellers then took control of the ticker tape, carving a multi-legged downtrend that finally ended at a seven-year low near $50 in 2019. The stock posted impressive gains into January 2020, topping out in the low $70s.

Price action tested 2019 support during the first quarter decline, attracting committed buyers in April, and completed a round trip into the prior high earlier this week. The stock is trading at a 21-month high on Thursday, raising the odds that the uptick will stretch into the 2018 high at $74.90. The forward dividend yield has dropped below 4.00% in the past two weeks due to rapid share gains, but it's still well above average for a food stock.

Dow component Procter & Gamble broke out above the 2000 high at $59.19 in 2005, but the uptick made limited progress, topping out at $75.18 at the start of 2008. The stock sold off to a six-year low during the economic collapse and undercut that level for less than a minute during the 2010 "flash crash." The stock finally broke out to a new high in 2013, but buying pressure faded in the mid-$90s in 2014, marking a resistance level that limited gains for the next five years.

The stock sold off to the mid-$60s in 2015, completing a trading range that held intact into a 2019 breakout that booked impressive returns into the February 2020 high at $128.09. The shares returned to that level this week after a 34-point first quarter decline and have broken out after the company beat fiscal fourth quarter 2020 estimates and raised 2021 guidance. Procter & Gamble currently pays a decent 2.46% dividend yield despite excellent upside, giving investors two good reasons to jump on board.

The Bottom Line

High-yield equity plays are waking up as we head toward the dog days of August, offering income-minded investors solid returns with lower risk.

Disclosure: At the time of publication, the author held Kellogg shares in a family account but no positions in the other aforementioned securities.