The solid bull market run over the past several years has shifted investor interest away from quality stocks and toward growth stocks, but that trend might reverse if the market turns bearish. This is known as the "Flight to Quality."
Many investors define quality stocks as those that offer more reliability and less risk.
Investors who believe the positive trajectory of today’s market will soon come to a close have several investing options to turn to for quality stocks. These stocks may not have the rapid share price increases that growth stocks enjoy, but they have a more stable balance sheet and dependable earnings.
Quality stocks have fared well over the past year. The iShares Edge MSCI USA Quality Factor ETF (QUAL), which includes quality stocks like Johnson & Johnson (JNJ), Starbucks Corp. (SBUX) and Visa Inc. (V), has gained 9.29% year-to-date. This fund includes large- and mid-cap stocks that are "quality" for metrics such as return on equity, earnings variability and debt-to-equity.
Goldman Sachs analysts say quality names can help investors beat the market with long-term growth that not only maintains high returns, but expands them. The firm recently identified 50 quality stocks that have defensive characteristics with long periods of industry leadership, as well as high free cash flow that is improving. Goldman Sachs also factored in valuation, which can help investors find bargains amid a market with sky-high share prices.
Here are three of Goldman Sachs' top 50 picks in quality stocks on U.S. exchanges. They have among the highest dividend yields of the companies on the list and represent solid long-term investments. All numbers are accurate as of September 26, 2018.
Enterprise Products Partners L.P.
Enterprise Products Partners L.P. (EPD) has a dividend yield of 5.91% with an annualized payout of $1.72. The company has a history of increasing its dividend every quarter, going back for nearly two decades. The energy company – which has a portfolio of mostly fee-based businesses, including pipelines, storage and processing facilities – has been able to do this through building or purchasing assets that generate cash, while also maintaining a strong financial profile. The company completed $4.5 billion in growth projects last year and has more than $5 billion in growth projects in development due to finish up over the next few years.
The energy company has been steadily improving its financial results, and looks to benefit from the ongoing jump in oil prices. The company reported both first- and second-quarter 2018 earnings and revenue that topped forecasts and increased from a year earlier. Third-quarter results are expected to show year-over-year growth as well.
Enterprise Products Partners L.P. shares are up 8.3% year-to-date.
Public Storage (PSA) offers a 3.95% dividend yield, with an annualized payout of $8. The company also announced a $2 per share dividend, but investors had to get in by June 11, 2018. As of June 12, it trades ex-dividend.
A real estate investment trust (REIT), Public Storage has indirect equity interests in 2,348 self-storage facilities in the U.S. It also has a business segment in Europe. The company expanded throughout 2017 and the first half of 2018 and is primed to continue its growth through the rest of the year. The Glendale, Calif.-based REIT reported first-quarter 2018 core funds from operations of $2.48 per share, topping estimates and rising nearly 5% from the year-ago figure. Second-quarter estimates are for year-over-year growth.
Public Storage shares are up 3.76% year-to-date.
Schlumberger Ltd. (SLB) offers a 3.20% dividend yield, with an annualized payout of $2.00. It is the highest dividend yield among the major oilfield equipment and services companies.
The company recently reported second-quarter 2018 quarterly revenue and earnings that rose from a year ago, with earnings of 31 cents per share beating expectations and improving from the loss in the year ago quarter. However, quarterly revenue was short of expectations. The company benefited from a rebound in drilling action in Russia and the North Sea, which was partly tempered by higher mobilization costs.
The company said in its forecast that a recovery in international oil markets is underway and that it expects double-digit growth over the next year in its profitable international drilling unit.
Schlumberger shares are down nearly 10% year-to-date, after falling nearly 20% in 2017, but the company said its outlook for the near term remains robust. (See also: Why Schlumberger is a Name You Should Know.)