Doomsday predictions are hitting headlines again. So how can you be prepare your portfolio? We created a list of dividend stocks we feel might offer some safety in a market decline.
To make the list, stocks met the following criteria
- Market cap above $300 million
- Positive VIX Correlation
- An outstanding history of dividend payments and yield increases
Positiv VIX Correlation
Doug Kass of Seabreeze Partners called attention on Tuesday to a nerve-wracking chart that compares the Standard & Poor 500 index with the VIX index. It shows a striking parallel to low VIX and an imminently steep decline in the markets.
The VIX indexes the volatility of all of the stocks in the S&P 500. That means if the S&P 500 is highly volatile, the VIX index climbs. VIX values above 30 typically reflect great volatility, while values below 20 reflect calmer markets. The VIX is at a multiyear low of 13.45. And according to this chart, we can expect a heavy drop-off any day now.
If you believe in this chart’s uncanny predictive abilities, you’re probably wondering what you can do to protect your portfolio.
With this in mind we ran a screen to see which stocks perform well in times of high volatility, with a high positive correlation to the VIX index. That means if the S&P 500 is highly volatile, the VIX index climbs, and these correlated stocks tend to climb with it.
Bill Gross says additional FED easing is coming soon and interest rates will stay low. So, being the case, bonds aren’t expected to do very well, and investors pulling out of their money out of bonds are likely to reposition it in equities. And more likely than not, equities with reliable returns, or dividends.
While dividends are never guaranteed, we looked at the DRiP Investing Resource Center list of “dividend Champions” – or stocks that have consecutively paid and raised yields for 20+ years. This consistency boosts investor confidence in future payments.
So we screen our positively correlated VIX stocks with those on the Dividend Champions list.
Business Section: Investing Ideas
We were left with 5 stocks. As a recap: these dividend paying stocks could receive extra attention if bonds yields stay low and investors look for new sources of near guaranteed returns. They also have the potential to hedge a volatile market according to their correlation to the VIX index. In times of high volatility, investors also tend to view dividend stocks more favorably, increasing demand and pushing prices higher. (This was exemplified by the outperformance of high yield stocks in 2011)
We also noticed that 3 of the five names had significant decreases in short positions month over month, a bullish sign that sophisticated investors are feeling more optimistic about their near term performance.
Do you think these names can help you hedge a market drop? Use this list as a starting point for your own analysis.
Interactive Chart: Use the Compare-O-Matic to see changes in dividend yield:
1. ABM Industries Inc. (ABM, Earnings, Analysts, Financials): Provides facility services for commercial, industrial, institutional, and retail facilities primarily in the United States. Market cap at $1.1B, most recent closing price at $20.30. Has been raising dividends for 45 consecutive years to a current yield of 3.11%. Correlation with the VIX index at 0.657 over the last 60 days. Shares shorted have decreased from 3.83M to 1.90M over the last month, a decrease which represents about 4.26% of the company’s float of 45.31M shares. Days to cover ratio at 3.93 days.
2. Archer Daniels Midland Company (ADM, Earnings, Analysts, Financials): Procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. Market cap at $17.3B, most recent closing price at $26.27. Has been raising dividends for 36 consecutive years to a current yield of 2.68%. Correlation with the VIX index at 0.831 over the last 60 days.
3. Mercury General Corporation (MCY, Earnings, Analysts, Financials): Engages in writing private passenger and commercial automobile insurance in the United States. Market cap at $2.09B, most recent closing price at $38.04. Has been raising dividends for 25 consecutive years to a current yield of 6.73%. Correlation with the VIX index at 0.718 over the last 60 days. Shares shorted have decreased from 786.15K to 207.81K over the last month, a decrease which represents about 2.15% of the company’s float of 26.84M shares.
4. Mine Safety Appliances Co. (MSA, Earnings, Analysts, Financials): Develops, manufactures, and supplies health and safety products used by workers in the fire service, homeland security, construction, and other industries, as well as the military. Market cap at $1.35B, most recent closing price at $36.40. Has been raising dividends for 41 consecutive years to a current yield of 3.26%. Correlation with the VIX index at 0.606 over the last 60 days.
5. Old Republic International Corp. (ORI, Earnings, Analysts, Financials): Engages in insurance underwriting business. Market cap at $2.35B, most recent closing price at $9.07. Has been raising dividends for 31 consecutive years to a current yield of 8.80%. Correlation with the VIX index at 0.505 over the last 60 days. Shares shorted have decreased from 9.66M to 6.65M over the last month, a decrease which represents about 1.27% of the company’s float of 237.67M shares. Days to cover ratio at 1.9 days.
Written by Rebecca Lipman. VIX and short data sourced from Yahoo! Finance. Dividend data from DRiP. All other data sourced from Finviz.
Use Kapitall’s Tools: Looking for ways to analyze this list?
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Analyze These Ideas: Getting Started
- Read descriptions for all companies mentioned
- Access a performance overview for all stocks in the list
- Compare analyst ratings for the companies mentioned
- Compare analyst ratings to annual returns for stocks mentioned
- Real-Time Opinion: Scan the latest tweets about these companies (feed will open in a new window)
Dig Deeper: Access Company Snapshots, Charts, Filings
- ABM Industries Inc. (ABM, Chart, Download SEC Filings)
- Archer Daniels Midland Company (ADM, Chart, Download SEC Filings)
- Mercury General Corporation (MCY, Chart, Download SEC Filings)
- Mine Safety Appliances Co. (MSA, Chart, Download SEC Filings)
- Old Republic International Corp. (ORI, Chart, Download SEC Filings)
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