In the chase for more return with less risk, one market watcher went yield hunting on the S&P 500. Gina Sanchez, CEO of Chantico Global, found one worth a buy and another to avoid.
Speaking on CNBC’s “Trading Nation” on Thursday, Sanchez vetted Macy’s, Phillip Morris, Verizon and Exxon Mobil, four S&P 500 stocks with some of the highest yields. The key to success when yield hunting, she says, is to pay attention to the fundamentals underpinning a company’s ability to maintain its dividend.
“Of all of those, I think Exxon Mobil probably has the best chances for sustainability over the long run of that dividend,” said Sanchez. “Exxon Mobil is coming out of a lull.”
The oil company is expected to post 18 percent profit growth in its March-ended quarter, benefiting from tax code changes and improving crude prices. Earnings this year are forecast to climb to $4.73 a share, Exxon’s best annual performance since 2014 before the worst of the oil slump.
Expected gains in crude prices through to the end of the decade should continue to support Exxon, said Sanchez. U.S. oil prices have recovered to nearly $70 since hitting a low of $26.05 in February 2016. Prices are now trading at their highest levels since the end of 2014.
Exxon Mobil has a dividend yield of 3.9 percent. Its payout ratio, the level of profit it redistributes to shareholders, is above average at 66.5 percent. The S&P 500 has a payout ratio of 36.3 percent.
Looking to the worst of the high-yielding stocks in the S&P 500, Sanchez says Macy’s is at the bottom of the pile.
“The retail sector has been really in a bad place and Macy’s, in particular,” said Sanchez. “Their balance sheet doesn’t look nearly as good.”
Sales and earnings growth in the U.S. retail sector is expected to plateau through 2020, according to FactSet estimates. Revenue in 2018 is expected to climb 9 percent, but drop to 5 percent and 3.8 percent growth in 2019 and 2020, respectively. Macy’s sales are expected to come in flat in fiscal 2019 and 2020.
Macy’s has a comparatively high dividend yield at 5 percent compared with 1.9 percent on the S&P 500. It has a payout ratio of 30 percent.
Mark Tepper, president of Strategic Wealth Partners, says when hunting for dividend picks, it’s better to identify potential than payout.
“We are not particularly fond of high-yielders especially in a rising rate environment where they tend to underperform,” Tepper told “Trading Nation” on Thursday. “But we do like the dividend growers which are those companies with the lower payout ratios that still maintain the ability to keep some earnings to grow their stock price and grow dividends down the road.”
To help identify those with potential, Tepper says to isolate stocks at the sweet spot — a dividend yield above the S&P 500 and a payout ratio below it. Exxon Mobil, Tepper’s pick of the bunch, does not meet those conditions as its payout ratio is above the index.