Deep Dive: These strong dividend payers sank with the stock market — and now their yields have shot up

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The U.S. stock market has been devastated, with a 28% decline from record highs and all but three S&P 500 members in the red. Daniel Peris of Federated Hermes, as a long-term dividend-growth investor, is picking through the wreckage.

The 20-year veteran of the stock market sees many bargains that he wouldn’t have bought a month ago. The bull market had driven prices so high that yields were at historic lows.

Peris is now suggesting that investors who need income look at sectors that may not be grossly affected by the spread of the virus or the oil-price decline, and whose yields have increased considerably during the market decline that followed the S&P 500’s SPX, -9.51%  most recent record closing high Feb. 19.

Those sectors include consumer staples, communication services, health care, utilities “and even technology,” he said during an interview March 11.

“Indiscriminate selling leads to opportunities for active managers,” Peris said.

Pointing to the incredible popularity of index funds (the SPDR S&P 500 ETF SPY, -9.57%  is a prime example), he said that index-fund and ETF managers had been forced to sell shares of “largely unaffected” companies, along with ones in hard-hit industries, such as energy, hospitality, air and cruise travel.

“There are companies that aren’t significantly impaired, but they are [much cheaper] than a month ago,” he said. “That is the opportunity, a structural flaw in the passive approach that has dominated in the last decade. It was tested during the fourth quarter of 2018 [when the S&P 500 fell 14%], and it is being tested now.”

‘Indiscriminate selling leads to opportunities for active managers.’

Peris is head of the strategic value team at Federated Hermes, in Pittsburgh, which has about $32 billion in assets under management and advisement. He co-manages the $8.1 billion Federated Strategic Value Dividend Fund SVAIX, -10.57%. The fund’s institutional shares are rated four stars (out of five) by fund-research firm Morningstar.

He sees the coronavirus and its associated slowdown as exacerbating a long-term deflationary trend, which is making it more difficult for companies to increase their dividend payouts. That said, his goal is to grow dividend payouts by 4% to 5% a year, in dollars and unadjusted for inflation.

Federated Hermes

Dan Peris, head of the strategic value team at Federated Hermes.

Income-seeking investors for years have been forced to take on more risk as bond yields have declined. The current crisis has completely distorted the fixed-income yield environment as investors have flocked to U.S. Treasury securities.

A quick look at the Treasury yield curve for March 12 illustrates this point. Yields on Treasury paper with maturities ranging from one month to 10 years were all well below the Federal Reserve’s current target range for the federal funds rate of 1% to 1.25%, while the yield on 20-year U.S. Treasury bonds was 1.27% and the yield on 30-year TMUBMUSD30Y, +6.61%  bonds was 1.49%.

The Federal Open Market Committee announced an emergency cut in the federal funds rate to the current range of 0.50% on March 3. Investors have shown through the rapid decline of yields that they expect another significant cut at the Fed’s regularly scheduled meeting on March 17 and 18.

A dividend-stock screen

Peris was unable to discuss individual stocks, because he was actively changing the portfolios he manages to take advantage of the market turmoil.

But based on his recommendation of looking at rising yields in the consumer staples, communication services, health care, utilities and information-technology sectors, the following screen includes 25 S&P 500 stocks in those sectors, with yields of at least 3.00% as of the close on March 12, and with yields increasing the most since the benchmark index reached its most recent closing high Feb. 19.

The list was filtered to exclude any company that had cut its regular dividends (including “extra” dividends which some companies pay regularly, and which can vary), since the end of 2006.

The purpose of looking so far back was to eliminate any companies that had cut dividends during or after the financial crisis of 2008, as market stress began to appear in 2007. Some of the companies initiated dividends later than the end of 2006, but haven’t cut payouts.

Of course, having at least maintained dividends through these years doesn’t mean these companies won’t but cutting payouts in the wake of the unprecedented “double hit” that world markets are taking from the coronavirus and Saudi Arabia’s decision to increase oil production at a time of greatly reduced demand.

But it may provide some comfort as you look ahead.

Here’s the pared list, sorted by how much the yields increased between Feb. 19 and March 12:

You can click on the tickers for more about each company.

As always, if you see any stocks of interest listed here, you need to do your own research and consider how likely a company’s business strategy is to remain competitive over the next decade, at least. The history of maintaining dividend payouts doesn’t guarantee a smooth path forward. You also will need to be able to handle plenty of price volatility.

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