CVS stock yields 3.2%.
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As the economy worsens, Treasuries aren’t necessarily the only refuge for investors.
“During Uncertainty, Focus on Sustainable Dividend Growers” read the headline of a UBS equity research note on Friday.
The report cites a difficult investing backdrop that includes “continued inflation concerns, violent moves in the yield curve, and the market forecasting future Fed rate cuts.”
The report’s authors compiled a list of 30 stocks, with three-year dividend growth rates at least in the mid-single digits, based on the projections of UBS analysts. All have Buy ratings from that firm.
Other criteria for the stock screen included having a dividend yield above the 1.7% average for the S&P 500 and sustainable payout ratios. The payout ratio measures the percentage of earnings that get paid out in dividends.
The report observes that “S&P 500 dividend growth has been significantly less volatile than [earnings per share] and buyback growth and therefore should be more resilient.”
It also maintains that “dividend stocks can provide a margin of safety during uncertain times.”
Barron’s decided to narrow the list and focus on utilities, whose dividends appear to be durable heading into an economic downturn, and a few other industries.
That includes Eaton (ticker: ETN), which makes a range of products such as electric components, brakes, and cylinders. The stock, which yields 2%, has a one-year return of 11% through March 30, including dividends, compared with minus 10% for the S&P 500. UBS projects Eaton will grow its dividend by 8.6% a year from 2022 through 2025.
Another company on the list is home-improvement retailer
Home Depot
(HD), which yields 2.9% and has a one-year return of minus 5%. Its projected annual dividend growth is 10%.
Prescription drug distributor
Cardinal Health
(CAH), which UBS expects to grow its dividend at a 7.2% annual clip, is yielding 2.6%. The stock has a one-year return of 35%.
The compound annual dividend growth projection for CVS Health (CVS) is 9.7% through 2025. The stock, which yields 3.2%, has a one-year return of minus 26%. Besides a national drugstore chain, the company’s assets include Aetna, a large managed-care operator. It’s in the process of acquiring
Oak Street Health
(OSH), which operates primary care centers.
Turning to utilities, which offer some defensiveness to a portfolio, Houston-based
CenterPoint Energy
(CNP) has a one-year return of minus 2%. It yields 2.6%. UBS projects that its three-year annual dividend growth through 2025 will be 8%. The company has been investing in its transmission and distribution grid—expenses that are expected to help boost earnings as the company’s assets grow.
Shares of another utility,
Exelon
(EXC), have a one-year return of minus 9% and yield 3.5%. The company’s holdings include several utilities, including Baltimore Gas and Electric and Potomac Electric Power. UBS puts its three-year annual dividend growth at 7.5%.
Another utility to consider is
American Electric Power
(AEP), yielding 3.7%. The stock has returned minus 6% over the past year. UBS projects that its dividend will grow at a 7% annual clip through 2025. Based in Columbus, Ohio, the company generates, transmits and distributes electricity across a geographically diverse company. The states in which it has regulated operations include Arkansas, Indiana, Kentucky, Louisiana, Michigan, Oklahoma, Texas, and Virginia.
Write to Lawrence C. Strauss at [email protected]
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