The U.S. stock market has plunged in the last few weeks after rallying to record highs over the last 12 months. This plunge appears to have caught many by surprise given the extensive selling that has taken over since late last month.
Illustratively, the S&P 500 Index along with its ETF counterpart SPDR S&P 500 Trust ETF (SPY, Financial) are down 1.37% over the last 12 months, and this comes after it had already climbed more than 6%. As such, the interpretation is that they are both down nearly 8% from multi-year highs achieved less than three months ago.
On the other hand, the NASDAQ 100 Index is only up about 5.5%, down from about 14.5% gain achieved on July 20, which marked the end of a rally that began in mid-October last year. Its counterpart, the NASDAQ OMX Group (NDAQ, Financial) is up about 19%, down from a rally that helped it gain 24% through mid-August.
In general, this means that the NASDAQ 100 Index is down 9% in the last six weeks, while the NASDAQ OMX Group has dropped by more than 5% in three weeks. Also, notice that there has been a decent recovery over the last few days in the overall market, which has taken some of the decline seen at the beginning of this month out of the equation.
Nonetheless, the general performance of the U.S. markets has been down over the last couple of weeks, and this has left some investors perplexed by the way things have suddenly changed after enjoying a sustained period of upward movement for most of the last year. The recent rebound has also made the market appear more unpredictable, thereby making it even harder for long-only investors to pick out their positions.
However, on a larger scale, the August plunge appears to be more of a market correction rather than a signal of what may happen in the coming quarters. As such, a market crash appears less likely, though still highly unpredictable.
Which stocks are good plays when the market behaves this way?
Right now, there are those who still think that the market correction is not over, which means there could be further declines in the coming quarters. On the other hand, there are those who are convinced that the market correction is pretty much complete, which means we can now resume to normal market conditions.
This type of environment makes it hard to pick stocks that are likely to pay off in the coming quarters, because in most cases, the price movements will be determined by market sentiment and not the characteristics of the individual stocks.
However, under these circumstances, investors would want to look at stocks with low beta. This means that they have low sensitivity to market valuations. In addition, they would also want to make sure that the stock offers value for money, and this can be determined by looking at the dividend yield.
After sifting through several stocks in different industries, I have identified the following four as some of the most interesting picks at this time.
HCP (HCP, Financial) carries a beta of just 0.03, which makes it almost fully insulated from market fluctuations. HCP is a financial services company operating as an independent REIT in healthcare facilities. At the current price of $36 per share, the stock appears slightly expensive trading at a P/E ratio of about 46x compared to the industry average of about 23x.
However, when we look deeper, the company offers real value for money due to its trailing and forward dividend yields of 6.20% and 6.33%, respectively. HCP is investing well in its bid to expand its already diversified portfolio. In Q2, the company spent $1.4 billion worth of investments and this expenditure is expected to yield returns in the coming years.
Therefore, this means that investors can expect to continue receiving high dividends while at the same time betting on growth, but even more important is that HCP’s correlation with market volatility appears to cushion it against an unlikely market collapse.
Starwood Property Trust (STWD, Financial) is another interesting REIT which offers investors an option to capitalize on 9.1% dividend yield. The company also trades at a beta of 0.49, which means that it is insulated against market risk by about 50%.
The company focuses on investing in commercial mortgage-backed securities and other commercial real estate-rated debt investments. It carries an impressive profit margin of about 96% and trades at a trailing P/E ratio of 9.88x. The company’s P/B ratio of just 1.2x also makes it look particularly cheap. Overall, the company’s P/E ratio of 9.88x tramps industry average of 16.56x, as does its gross margin of 98% versus 75% for the industry.
The company has also managed to grow its dividends by 3.3% over the last three years. The company also announced at the end of June an upward revision of the convertible rates on financial notes dated 2018 and 2019, which triggered a significant rebound in the price.
Note: The Beta rates in this chart are as of Aug. 31, and the idea is to show how historically these stocks have traded at a low beta.
AT&T (T, Financial), the Dallas, TX-based telecommunications giant has always been one of my favorite picks when it comes to dividend plays, and it still is. The company boasts an impressive trailing and forward dividend yields of 5.70% and 5.77%, and with a beta of just 0.55, AT&T is definitely a good stock to bet on given the current unpredictable nature of the market.
AT&T also trades at an impressive forward P/E ratio of 11.79x, while the PEG ratio of 2.72x is in line with industry average of about 2.73x. The company has entered into a multi-year agreement with Jaguar Land Rover North America in its bid to boost the connected car project launched last year. It is also expanding investment in Internet of Things “IoT” after launching the Dedicated Smart Cities initiative.
As such, AT&T is a dividend play with a bright future and given its relatively immune correlation with market risk, investors might want to look at it given the current market situation.
Verizon Communications (VZ, Financial) is the second largest telecommunications company in the US by market valuation, but only lags behind AT&T by a few million. However, it is one of the best picks at the moment for low beta-high dividend yield stocks, and also appears relatively cheap compared to AT&T. Verizon carries a beta of just 0.56, making it one of the most impressive stocks in that respect. It also trades at impressive trailing and forward dividend yields of 4.9% and 5%, respectively.
The company’s P/E ratio of about 18.83x is slightly better than the industry average of about 20.20x and also trades at a compelling PEG ratio of 1.80x versus 2.73x for the industry. The company also boasts one of the best gross margins in the industry at 60%, compared to an average of 54%.
Verizon Communications also increased the dividend by 3%, adding to its reputation as a good dividend payer. The company has also been linked with acquiring Cablevision (CVC, Financial), but analysts believe that the deal that is likely to happen is that of VZ selling its FiOS business and wireless assets to French telecom firm Altice. This would mean more cash for the company.
Conclusion
The bottom line is that after the recent plunge and rebound of the U.S. major indices and their fellow ETFs, the market is currently in a situation where it is difficult to determine the next move.
Under these circumstances, it is always wise to choose stocks with significant insulation to market risk while at the same time delivering decent value for money. This is why low beta high dividend yield stocks come out on top in this situation, and the four discussed above are some of the best in the industry.
