Build holdings in defensive and cyclical industries

Find out which stocks are great options that can help you with steady dividends.

  • By Andrew Graham,
  • U.S. News & World Report
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In the wake of the financial crisis, nearly every country around the world lowered interest rates to near zero (or below) and purchased bonds to try to stimulate growth – policies Japan put in place years before to fight unshakable economic stagnation during the 1990s.

In the years that followed, as the landscape improved, a few central banks – including the Fed – began to back off, but for the most part, rates remained at or near historic lows.

Amid the pandemic, policymakers have been even more aggressive than they were during the financial crisis of 2008-2009, using everything in their toolkit to stave off an economic catastrophe. All of this means that dividend-paying equities are about the only place for investors to find yield.

Companies are slashing dividends

The problem is the need to preserve capital has become paramount, meaning that an increasing number of firms have suspended payouts, including huge names like Ford (F), General Motors (GM) and Las Vegas Sands (LVS).

Scores of companies have put dividends on hold, and that figure will continue to grow.

Even some real estate investment trusts – many of which explicitly market their ability to produce income streams for investors in all types of environments – have ceased making payments.

Meanwhile, other firms have reduced dividends dramatically. That includes Royal Dutch Shell (RDS), which recently announced that it lowered its dividends by 66%, the first time it has instituted a cut in nearly 75 years. This list will also grow, and perhaps more than people think.

While many proud dividend payers will do everything possible to maintain that status, more than a handful of them are well-known brands that have either laid off workers or will soon have to.

That introduces a public relations problem: These companies will be portrayed as cozying up to shareholders at the expense of their employees.

Building a basket of holdings that can afford to continue dividend payments in the months to come will be complicated under any scenario. Given these variables, it could be even more problematic than it may seem at first blush. Still, it is possible.

Defensive industries

One key is to look for firms in defensive industries that sell products with relatively inelastic demand. Think of goods that consumers will continue to buy regardless of economic conditions.

Pharmaceuticals are a good example, such as companies like Merck (MRK) and Bristol-Meyers Squibb (BMY). Each has an average dividend yield of nearly 3%.

Cyclical industries

Another potential area of opportunity is with companies in cyclical industries that have both higher-than-average yields and enough earnings to cover dividend payments comfortably.

With that in mind, here are some under-the-radar opportunities to consider:

Nutrien (NTR): Based in Canada, Nutrien is the world’s largest producer of potash. This essential ingredient is used to preserve nearly every crop critical to today’s food supply, partly because it helps ward off infection and boosts water retention. It pays more than a 5% dividend. Based on earnings, it should be able to continue to do that barring a spectacular setback in the quarters to come.

Eastman Chemical Company (EMN): A subsidiary of Kodak – yes, that Kodak – Eastman Chemical makes fibers, plastics and chemicals used to coat everything from tires to industrial-sized windows. A diverse product mix should help smooth demand during a recession, and earnings are more than enough to finance the current 4.4% dividend.

CF Industries (CF): Similar to Nutrien, CF Industries manufactures and distributes nitrogen and phosphate fertilizer products globally. It pays a 4.6% dividend yield with a 2019 EBITDA (earnings before interest, taxes, depreciation, and amortization) that is nearly six times larger than its total dividend cost.

All of the above companies have dipped considerably in recent months. After reaching an all-time high last summer, Nutrien’s stock has dived more than 35%. Over the last six months, Eastman has plunged nearly 29%, while CF Industries has been hit even harder, down over 40% since the end of December.

The takeaway

That no doubt helps to explain why their current dividend yields are so attractive. But it is also worth noting that the good thing about cyclical stocks like these is just that – they are cyclical, meaning they tend to rebound when the broader macro environment improves.

And when that happens, these yields will, of course, go down – although the reason that would take place, their stock prices going up, should give investors more than enough solace.

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