Investing

S&P 500 Sector Laggards Offer Great Dividend Stocks: 4 to Buy Right Now

Lee Jackson

Published: July 18, 2016 10:45 am

Last Updated: January 13, 2020 5:36 am

Any time the markets hit and establish new all-time highs, the concern among Wall Street professionals is always what catalyst is there to drive stocks higher? One thing is for sure, earnings are the ticket to continued advances in the market, and the sectors that have lagged the market over the last four to seven quarters may be the ones that deliver the goods for investors.

For a variety of reasons, energy, materials, financials and technology have struggled for the past year and a half. With easier comparisons and dollar strength abating, two of these sectors, technology and financials, account for 35% of the S&P 500 earnings, and could be the key to earnings growth. Toss in energy and materials, which account for an additional 10%, and the market could sustain a higher level overall earnings growth.

We screened the Merrill Lynch research database for one Buy-rated dividend-yielding stock in each sector. We found four that make good sense now.

Intel

This leader in semiconductors is working hard to scale away from dependence on personal computers. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. The company’s platforms are used in various computing applications comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

The company also provides communication and connectivity offerings, such as baseband processors, radio frequency transceivers and power management integrated circuits, and tablet, phone and Internet of Things solutions, which include multimode 4G LTE modems, Bluetooth technology and GPS receivers, software solutions and interoperability tests, as well as home gateway and set-top box components.

Intel reported an inline first quarter, and lowered the forward outlook. Merrill Lynch stays positive on the company and believes there is solid upside potential for the stock. Some analysts think the restructuring can ultimately translate to $0.23 in annual earnings-per-share savings.

Intel investors receive a 2.97% dividend. The Merrill Lynch price target was recently raised to $40 from $36. The Thomson/First Call consensus price target is $36. Shares closed most recently at $35.07.

Occidental Petroleum

This is one of the higher yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an international oil and gas exploration and production company with operations in the United States, Middle East and Latin America. It is one of the largest U.S. oil and gas companies, based on equity market capitalization. Its midstream and marketing segment gathers, processes, transports, stores, purchases and markets hydrocarbons and other commodities in support of Occidental’s businesses. In addition, the wholly owned subsidiary OxyChem manufactures and markets chlor-alkali products and vinyls.

While the company reported a first-quarter 2016 loss that was wider than the consensus forecast, Occidental did report total revenue that beating the Wall Street estimates. The company continues to deliver capital expenditure cuts, and the expected total of $3 billion for this year is a mind-numbing cut of 50% from 2015 expenditures.

With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002.

Shareholders receive a 3.88% dividend. Merrill Lynch has an $87 price target for the stock, and the consensus target is set at $78.90. Shares closed just south of there on Friday at $77.32.
JPMorgan

This stock trades at a very low 10.8 times estimated 2016 forward earnings and recently reported very solid second-quarter results. JPMorgan Chase & Co. (NYSE: JPM) is expected to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on estimated price-to-earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide an earnings headwind throughout this year.

Improvement in loan growth, slow but improving equity capital markets, and a steady increase in deposits will be a solid plus. Trading at a discount to many of the large cap banks on 2016 earnings estimates helps upside potential as well. With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors.

Dimon put his money where his mouth was earlier this year and reportedly bought a stunning 500,000 shares of the stock for a massive $26 million. That brought his total holdings in the bank to 6.7 million shares, worth over $360 million.

JPMorgan investors are paid a solid 3.0% dividend. The $70 Merrill Lynch price target is about the same as the consensus target of $70.21. The stock closed Friday at $64.18 a share.

Dow Chemical

This large cap leader makes sense in all markets and is added to the Top Picks list. Dow Chemical Co. (NYSE: DOW) is a market-driven integrated, with an industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses. It delivers a broad range of technology-based products and solutions to customers in approximately 180 countries and in high-growth sectors such as packaging, electronics, water, coatings and agriculture.

With an improving economy domestically, and emerging markets bottoming, the growth potential for a company like Dow Chemical with multiple revenues and product silos is outstanding. Last year, Dow had annual sales of more than $58 billion and employed approximately 53,000 people worldwide.

Last December the company announced a huge merger with DuPont. It is planning to combine into a company valued at about $120 billion, which will then split off into three separate companies, one focused on materials, one on agriculture and one on nutrition and electronics specialty products. Many on Wall Street think that the merger offers a very solid investment for the future, and the sum-of-the-parts total may be far greater than the current value of the stock.

Dow Chemical investors receive an outstanding 3.53% dividend. The $62 Merrill Lynch price target compares with the consensus target of $59.31 and the most recently closing price of $52.06.

These are four quality companies in sectors that have struggled. Not only will their improved earnings help the overall S&P earnings outlook, they could very well boost all the stocks to new highs.