After seven straight down weeks for the S&P 500 Index and eight weeks of declines by the Dow Jones Industrial Average, stocks staged a big comeback from lows last Tuesday to finish the week with robust gains across the board. Sentiment gauges from the AAII survey to Investor’s Intelligence’s roundup of investment newsletter editor outlook had been flashing multi-decade highs in pessimism. Technically, put-call ratios had also spiked to levels associated with widespread panic. but now they are on the decline and helping to thrust stocks higher as pessimism recedes from unsustainable peaks.
The most important piece of economic news came out on Friday after the rally was well underway when the Commerce Department reported that the core personal consumption expenditure (PCE) price index rose at a 4.9% annual rate in April, which was a deceleration from the 5.2% pace in March. The report provided hope that the Federal Reserve would not need to be as aggressive as planned in hiking rates in the coming months. Next Friday’s nonfarm payrolls report for May will be another critical piece of data for handicapping the Fed’s moves.
By the end of the week, both the S&P 500 Index and the Russell 2000 Small Cap Index had both gained 6.6%. It would not be unreasonable to see this rally take the S&P 500 to it’s declining 50-day moving average, but there is a lot to prove for the bulls to make this burst of buying anything more than a rally within a larger downtrend.
The biggest gains last week came from the sector that has been the most beaten down this year: Consumer staples jumped higher by 9.5%. A 4.3% increase in crude oil prices helped drive the energy sector higher by 8.3%. Growth stocks outperformed value, and domestic equities performed better than international stocks.
Dividend growth funds have been big underperformers this year, but the style shined last week with T. Rowe Price Dividend Growth (PRDGX +6.2%), WisdomTree U.S. Quality Dividend Growth (DGRW DGRW +6.2%) and Vanguard Dividend Appreciation Index (VIG VIG +6.2%) all gaining more than 6%.
Also jumping more than 6% were the year-to-date total return leader, Alerian MLP (AMLP AMLP +6.2%) master limited partnership ETF, and the VanEck BDC Income (BIZD BIZD +6.2%) business development company ETF.
Our top performer was master limited partnership Holly Energy Partners, L.P. (HEP +8.9%). Also higher by more than 8% for the week were Luxembourg-based steel maker Ternium TX SA (TX +8.7%), chemicals maker LyondellBasell Industries LYB NV (LYB +8.5%), and International Business Machines (IBM +8.4%).
Capturing Call Premium On The Bounce
A medium-term bearish environment with at least a temporary burst of bullishness is one in which selling covered calls makes sense. Last Monday, we sold covered calls on Tyson Foods TSN (TSN +6.8%) and Kraft Heinz (KHC -0.3%). Both companies had ex-dividend dates last week.
Selling the same TSN $87.50 July 15 calls would now earn you $5.30, based on Friday’s closing price for Tyson of $91.04. With Kraft Heinz, the $39 July 1 calls we sold for $1.30 last Monday now trade for only $0.65-$0.70. Going out to the July 15 expiration and selling slightly in-the-money KHC $37.50 calls earns premium of $1.65-$1.70.
Part of the reason we are seeing a “risk-off” environment on Wall Street in 2022 is because – for the first time in a long time – you can get a decent payday in traditional fixed-income investments thanks to a rising interest rate environment. Consider that 10-year Treasury bonds pay almost 2.9% right now – more than double the yield of last summer – while the S&P 500 averages a dividend yield of just 1.4% right now. Many income investors aren’t willing to settle for the risk of stocks when they can instead get significantly higher yield in bond markets. However, the following S&P 500 components offer a way to tap into outsized yield that may make them worth a look – with a minimum yield of 4.7% and payouts as high as 8.6% at current pricing.
By now, everyone knows how bad smoking is for your health. But as with sugary soft drinks or fatty fast food, just because something is unhealthy doesn’t mean consumers will stop buying it. And as we enter a period of volatility for the stock market thanks to price inflation, many investors are learning that smokers are incredibly reliable customers. That makes $160 billion tobacco icon Philip Morris a slam dunk thanks to leading brands such as Marlboro, the best-selling cigarette in the world, along with its other popular products. PM dividends have roughly doubled from 64 cents quarterly back in 2011 to $1.25 as of the beginning of this year, adding up to one of the best yields in the S&P 500 index.
Office real estate operator Vornado has a portfolio concentrated in the nation’s key metropolitan markets, including prime properties in New York City, Chicago and San Francisco. Vornado is also the leading firm when it comes to sustainable commercial properties, with over 23 million square feet of Leadership in Energy and Environmental Design, or LEED, certified buildings. Structured as a REIT, or real estate investment trust, VNO must deliver 90% of its taxable income back to shareholders each year – meaning a mandate for consistent and generous dividends for shareholders.
Another REIT, Simon differs from Vornado in that it is one of the largest mall owners in America. Its locations are focused on shopping, dining, entertainment and mixed-use destinations instead of commercial real estate high-rises. COVID-19 was naturally quite tough on Simon; however, the recovering economy and the decline of social distancing restrictions has allowed SPG to get back on track. Shares have more than doubled from this time two years ago, and Simon just gave dividend investors a lot more to like with a big boost of almost 27% in its payout this year.
Old-school tech giant IBM isn’t often included in the same conversations as dynamic and younger firms like Amazon.com Inc. (AMZN) or Google parent Alphabet Inc. (GOOG, GOOGL). However, “Big Blue” still has a lot to offer. Its deep enterprise technology relationships in software, consulting and IT infrastructure make the company tremendously profitable. Though the company forecast earnings per share north of $10.50 next fiscal year, dividends currently only add up to $6.56 annually. That means the generous dividends aren’t just sustainable but ripe for future increases down the road, even if earnings don’t grow at the outsized rates you’ll find at more ambitious Silicon Valley firms.
Big Oil companies have gotten a lot of attention this year, but integrated energy giants that have risen along with crude oil are not as generous with their dividends as smaller and more focused players like Oneok. OKE is a play on the “midstream” portion of the energy business alone, which involves transportation and storage and is not exposed to the risks of commodity price volatility. Oneok helps move natural gas around the U.S. and charges fees for that service, then passes a portion of that cash on to shareholders. Income investors will take comfort in this stable model, which supports strong cash flows regardless of the price of a barrel of oil in 2023 and beyond.
KMI is another energy infrastructure company operating across North America, with a network of natural gas and crude oil pipelines, as well as storage and processing facilities. All told, the stock owns roughly 83,000 miles of pipelines and almost 150 terminals and is valued at nearly $45 billion. With a scale like that, alongside a midstream focus that insulates it from the ups and downs in oil and gas prices, it should be no surprise that KMI is one of the most reliable income plays in the S&P 500 right now.
You may see AT&T stock in some screening tools with a higher yield, but keep in mind that is based on previous payouts before a recent spinoff of Warner Bros. Discovery Inc. (WBD) that reduced both the market value of parent AT&T along with its dividend potential. However, a new dividend run-rate of about 28 cents per share quarterly annualizes to a yield that is more than four times the typical S&P 500 component. And furthermore, the spinoff helps management focus on the core business of this long-standing telecom leader. Shares have rallied strongly since March as Wall Street has looked ahead to life after the split, and with a big-time payout there’s reason to think this run could continue in 2022.
The $100 billion tobacco icon Altria is behind some of the biggest brands in North America, including its flagship Marlboro cigarettes, Black & Mild cigars and smokeless tobacco products including Copenhagen and Skoal. Yes, the health risks of these tobacco products are real. But that doesn’t stop millions of customers from buying Altria products despite this. And with the company increasingly looking beyond this core revenue stream to cannabis-related goods and vaping products, there’s a good chance this “sin stock” will see consistent profits and generous dividends for the foreseeable future regardless of whatever morality you assign to its business model.
Lumen is a telecommunications company offering voice and data connections, along with related services including cloud solutions and cybersecurity add-ons. CenturyLink rebranded itself Lumen Technologies a few years ago, in the wake of a series of big-time acquisitions including the purchase of Level 3 Communications for about $25 billion, but despite that big price tag the current LUMN stock valuation is only about $12 billion or so. There are challenges for this second-tier telecom, including its large debt load from those previous deals. However, income investors who don’t mind the risk may be interested in the big-time yield of this top S&P dividend stock as a hedge against potentially lackluster share performance.
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