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Dividend stocks have lost momentum but there is still potential upside, according to the UBS equity strategy team.
“Dividend growth should outpace earnings growth this year and valuations are undemanding,” strategists Alastair Pinder and Keith Parker wrote in a note. “According to our machine learning model, high dividend yielding stocks have also undershot fundamentals by 3% over the last 3 months.”
“The risk/reward for dividend stocks also appears attractive given they should be relative winners in a number of macro scenarios including recession, sticky inflation and tighter fin conditions,” they said. “High quality dividend stocks look particularly attractive: they offer greater downside protection, have stronger pricing power, trade at a 15-20% valuation discount vs the market and the payout ratio (45%) is 5 ppts below average implying upside to dividend growth.”
“To take advantage of the dividend theme, we present a screen of 40 stocks from the S&P 1500 (NYSEARCA:SPTM) (VLU) with a 2023e dividend yield >2%, a high quality score which ranks in the top 25th pctl and a strong relative dividend growth prediction over the next 6 months according to our machine learning model,” they noted.
“Our screen has outperformed by 5.5% over the last 6 months and despite the market rotations and rally has remained relatively resilient over the last month underperforming by ~1.5%. The screen trades at a 15% discount vs the market compared to a 8% discount at the beginning of 2021, has a dividend yield of 2.6% and a payout ratio of 40%.”
The stocks in the screen are:
Discover Financial Services (DFS), 2023 estimated dividend yield 2.20% Cal-Maine Foods (CALM), 2.09% Public Storage (PSA), 3.02% PDC Energy (PDCE), 2.40% Snap-on (SNA), 2.54% Broadcom (AVGO), 3.05% Ralph Lauren (RL), 2.60% Amgen (AMGN), 3.56% Comcast (CMCSA), 2.92% Packaging Corp of America (PKG), 3.52% Masco (MAS), 2.04% Williams-Sonoma (WSM), 2.26% APA (APA), 2.52% Colgate-Palmolive (CL), 2.70% Norfolk Southern (NSC), 2.23% Tapestry (TPR), 2.63% Pioneer Natural Resources (PXD), 2.02% Qualcomm (QCOM), 2.29% Robert Half (RHI), 2.09% Aflac (AFL), 2.41% Lamar Advertising (LAMR), 4.67% PepsiCo (PEP), 2.77% H&R Block (HRB), 2.94% Union Pacific (UNP), 2.61% ConocoPhillips (COP), 2.90% Merck (MRK), 2.75% Watsco (WSO), 2.81% Genuine Parts (GPC), 2.23% Procter & Gamble (PG), 2.68% Paychex (PAYX), 2.82% Murphy Oil (MUR), 2.74% Fastenal (FAST), 2.48% Home Depot (HD), 2.47% Extra Space Storage (EXR), 3.95% Capital One Financial (COF), 2.23% Marathon Petroleum (MPC), 2.43% A.O. Smith (AOD), 2.46% General Mills (GIS), 3.03% Target (TGT), 2.34% UPS (UPS), 3.36%
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