The solid bull market run over the past several years has shifted investor interest away from quality stocks toward growth stocks, but those trends might reverse if the market should turn bearish. This is known as the “Flight to Quality.”
Investors who believe the positive trajectory of today’s market will soon come to a close have several investing options in quality stocks to turn to. These stocks may not have the rapid share prices increases that growth stocks enjoy, but they have a more stable balance sheet and dependable earnings.
Quality stocks have fared well over the past year, although not quite as well as growth stocks. The iShares Edge MSCI USA Quality Factor ETF (QUAL), which includes quality stocks like Johnson & Johnson (JNJ), Starbucks Corp. (SBUX) and Visa Inc. (V), rose 20 percent in 2017. This fund includes large- and mid-cap stocks that are “quality” for metrics such as return on equity, earnings variability and debt-to-equity.
Goldman Sachs analysts say quality names can help investors beat the market with long-term growth that not only maintains high returns, but expands them. The firm recently identified 50 quality stocks that it believes have defensive characteristics with long periods of industry leadership, as well as high free cash flow that is improving. Goldman Sachs also factored in valuation, which can help investors find bargains amid a market with sky-high share prices.
“The key ingredients of competitive advantage haven’t changed and likely never will – entry barriers should always be critical as should pricing power and access to growth,” the firm wrote in a June 25 report.
Here are three of Goldman Sachs’ top 50 picks in quality stocks on U.S. exchanges. They have the highest dividend yield of all the companies on the list as of February 27):
Enterprise Products Partners L.P.
Enterprise Products Partners L.P. (EPD) has a dividend yield of 6.61% with an annualized payout of $1.70.
The energy company has been steadily improving its financial results, but saw a more mixed third quarter. In the third quarter, Enterprise Products reported adjusted earnings of $0.30 per share, flat from a year ago, but just short of analysts estimates, on revenues that rose from a year ago and topped analysts’ expectations. The company said that it posted year-over-year gains in every business segment despite the oil price slump.
Enterprise Products Partners L.P. shares are down 3.2% year-to-date.
Public Storage (PSA) offers a 4.08% dividend yield, with an annualized payout of $8.
A real estate investment trust (REIT), Public Storage has indirect equity interests in 2,348 self-storage facilities in the U.S. It also has a business segment in Europe.
The Glendale, Calif.-based company reported third-quarter revenue from its storage facilities of $686.4 million, up 3 percent from the previous year and better than what analysts were predicting. The company also saw core funds from operations rise year over year, surpassing expectations. The results reflected improved rents from across its facilities and better net operating income from same store and non-same store facilities. Public Storage shares are down 7.7% year-to-date.
Schlumberger Ltd. (SLB) offers a 3.01% dividend yield, with an annualized payout of $2.00. It is the highest dividend yield among the major oilfield equipment and services companies.
The company reported a better-than-expected $545 million in net income in the third quarter of 2017, up from $176 million in the same quarter in the previous year. Schlumberger had reported a net loss in the second quarter, that was nonetheless an improvement over the previous year’s net loss. The third quarter growth reflected strength in hydraulic fracturing, higher directional drilling in the United States and increased production in many international locations.
Schlumberger shares are down 0.7 percent year to date after falling nearly 20% in 2017, but the company said its outlook for the near term remains robust. (See also: Why Schlumberger is a Name You Should Know.)
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