By Jeff Reeves
After the volatility of early 2022 and the aggressive rate tightening by the Fed, there’s a return of chatter about the “Great Rotation” – that is, a broad move among investors to reduce exposure to growth-oriented stocks and increase their positions in value stocks as well as bonds.
Admittedly, we’ve seen head-fakes about the Great Rotation before. In late 2020 and early 2021, we saw yields surge and value stocks outperform troubled tech firms. That trend didn’t last, however, and there’s no guarantee the current environment will, either.
But with apologies to Sir John Templeton, this time really does feel different. We’ve seen the Fed execute four interest rates this year in the most aggressive period monetary policy in roughly 30 years.
If you’re looking to change your portfolio allocation away from old growth darlings, you don’t have to dive back into the bond market. There are some high-yield stocks out there that offer payouts that are roughly double that of the typical S&P 500 /zigman2/quotes/210599714/realtime SPX -0.94% stock – and even better than the roughly 3.0% yield of 10-year Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.55% .
And unlike some high yield stocks that are high risk, these three have exhibited relatively low volatility and have sustainable payouts that won’t be cut at the first sign of trouble.
JPMorgan Chase
In July, megabank JPMorgan Chase /zigman2/quotes/205971034/composite JPM -0.42% started the earnings parade for the financial sector, as usual. Unfortunately, those results didn’t blow anyone’s hair back, and the stock slumped after news of a modest earnings miss and that it would suspend stock buybacks.
However, the lull didn’t last long. Strong results from its peers reinforced the notion of a tailwind for the sector driven by higher interest rates and strong lending. Furthermore, the suspension of stock buybacks wasn’t thanks to any bad behavior or shortfalls; rather, it is part of meeting expected higher regulatory capital requirements through 2024.
Shares have snapped back by about 10% over the last month. The dividend yield is 3.4%.
What better way is there to play the broader tailwinds for the financial sector than with the largest bank in the U.S. by assets and by market cap, as the domestic economy continues to chug along and as rising rates boost net interest margins?
Besides, it’s not like JPM is losing relevancy. Consider a few details from its recent earnings report that show credit-card loan balances were up 9% in the quarter, and total spending among the bank’s customers grew 15% year-over-year. That’s not as sexy as the lucrative IPO and investment-banking businesses that were booming prepandemic, but it’s proof of the bank’s staying power.
Some dividend investors may be leery of the stock after its reductions in payouts in the wake of the financial crisis. But keep in mind that like current capital constraints, these cuts were in response to regulators. Also, while peers like Bank of America /zigman2/quotes/200894270/composite BAC -0.35% and Citigroup /zigman2/quotes/207741460/composite C -0.89% have yet to reach either 2008 share price levels and their quarterly dividend rates, JPM doesn’t have that problem; the current dividend rate of $4.00 annually is significantly higher than the payouts of $1.52 pre-crisis.
AbbVie
Leading pharmaceutical stock AbbVie /zigman2/quotes/202428675/composite ABBV +0.08% has admittedly lost some momentum from its 2022 highs. However, it’s still up on the year – and more importantly for income-oriented investors, pays more than double the yield of the S&P 500 at 4.0%.
The stock is riding a series of favorable trends, including continued resilience of its anti-inflammatory blockbuster Humira as well as strong growth for drugs Skyrizi and Rinvoq that treat autoimmune disorders. In July the company posted double-digit earnings growth – including a stunning 86% increase in sales of Crohn’s disease treatment Skyrizi, pushing the drug over $1 billion in quarterly sales for the first time.
The company’s brand is young, but it was formed by spinning out the branded pharmaceuticals and drug research arm in 2013 from parent Abbott Laboratories /zigman2/quotes/203724446/composite ABT -0.39% . That means you can actually trace the history back more than 130 years – including an enviable track record of 49 consecutive years of dividend increases through this parent.
But if you’re only concerned with recent history, there’s still a lot to like in this dividend leader. The company has increased its dividend by more than 250% since its inception. And on the heels of a $63-billion acquisition of Allergan in 2020, industry research firm Evaluate Pharma has predicted AbbVie will become the largest pharmaceutical company by prescription drug sales by 2028.
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