High-yielding stocks have been the worst bet this year. Here’s one way to improve that.

“Lackluster” earnings growth in 2023 will see dividend per share growth in 2024 ease to 4%, he reckons. Though, that’s not to be sniffed at in a market struggling for upward momentum.

But be careful. High dividend yielding stocks are not necessarily high quality, or as safe as many believe, says a team of analysts at Piper Sandler led by Michael Kantrowitz.

“Sure, a portfolio of higher dividend yielding stocks can provide some margin of safety compared to some valuation metrics, but it can also be littered with value traps too!,” they say in a note published this week.

The chart below illustrates just how much high-dividend yielding stocks have underperformed the top quality factors for the year to date, and the table shows it is the worst of all 118 factors Piper Sandler tracked.

What has caused this poor performance? There have been two significant headwinds for these stocks this year.

“One issue is that bond yields have increased so much that Treasury yields across the curve are above the yield offered on the highest dividend yielding stocks (top quintile),” says Pier Sandler

This will be a new phenomenon for younger investors, because since the great financial crisis the high dividend yield factor has generally provided a greater yield than benchmark bonds.

The other headwind is that dividend yield is a cyclical factor, and this has not been a year where cyclical factors have been outperforming.

“Even though high dividend yield was historically thought of as a more stable trait due to the cushion of the dividend payment, we show that the factor is actually quite cyclical!” says Piper Sandler.

This is partly because dividend changes are business-cycle sensitive. High-dividend yielding stocks are strongly positively correlated with economic growth, which impacts earnings growth trends and thus payouts.

So, the question investors should ask is: How to find the high quality high dividend payers? The answer says Piper Sandler is to analyze stocks by what the broker calls an “ability to sustain.” This is calculated by taking cash flow and deducting preferred dividends and capex, then dividing the result by common dividends.

“Our ability-to-sustain screen aims to help find higher quality companies with sustainable dividends. Year to date, using the ATS screen as an overlay on a high dividend yield screen would have increased returns by 9% vs. just screening for high dividend yield,” says Piper Sandler.

A sample list of high yielding stocks with an ATS ratio of greater than 1, which Piper Sandler deems an attractive dividend payer, includes Altria
MO,
+1.30%,
Verizon Communications
VZ,
-2.38%,
Keycorp
KEY,
-1.28%,
Truist Financial
TFC,
-2.05%,
Comerica
CMA,
-2.73%,
Boston Properties
BXP,
-0.34%,
AT&T
T,
-1.27%,
Simon Property
SPG,
-1.06%
and Citizens Financial
CFG,
-1.79%.

Markets

U.S. stock-index futures
ES00,
+0.17%

YM00,
-0.41%

NQ00,
+1.17%
are higher as benchmark Treasury yields
BX:TMUBMUSD10Y
nudge higher. The dollar
DXY
is little changed on the day, while oil prices
CL.1,
+1.11%
rally and gold
GC00,
-0.39%
sits just shy of $2,000 an ounce.

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The buzz

The Federal Reserve’s favored inflation gauge was published at 8:30 a.m. Eastern. The core personal consumption expenditure index for September rose as expected by 3.7% over the previous 12 months, slowing from August’s revised 3.8% increase. The month-on-month reading also came in as forecast, accelerating to 0.3% from 0.1%.

Other U.S. economic data due on Friday include the final reading on October consumer sentiment, due at 10 a.m..

Shares of energy giants Chevron
CVX,
-5.59%
and Exxon Mobil
XOM,
-1.93%
were initially a bit softer after earnings missed forecasts.

Amazon.com
AMZN,
+8.41%
shares are up more than 6% in Friday’s premarket action after the cloud and retail giant delivered a big earnings beat.

Intel stock
INTC,
+9.19%
is jumping nearly 8% after the chip company crushed expectations for its third quarter and delivered an upbeat forecast.

Shares of Ford Motor
F,
-9.38%
are off nearly 3% after the company withdrew guidance, citing the pending agreement with the United Auto Workers, and revealed a $1.3 billion loss for its EV unit.

Brent crude oil
BRN00,
+0.85%
rose back above $90 a barrel as the market was rattled by U.S. strikes on Iran-backed groups in Syria.

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The chart

The stock market decline over the past two days was triggered by disappointing third quarter earnings results and guidance from Google parent Alphabet
GOOGL,
+0.25%
and Facebook
META,
+3.03%
that caused communications and technology stocks to drop sharply, says Ed Yardeni, president of Yardeni Research

“On the other hand, Microsoft
MSFT,
+2.06%,
IBM
IBM,
-0.76%,
Intel
INTC,
+9.19%,
and Amazon all beat expectations this week,” he notes, yet the market still fell. Why? Answer: “Of course, the recent selloff may reflect a downward rerating of the market’s valuation multiple as a slightly delayed response to the jump in the bond yield to 5.00%,” he says.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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