Stocks might be rebounding, but there is still plenty of uncertainty about where investors should look for value in the market as the coronavirus pandemic creates the sharpest labor-market collapse in modern history.

Corporate winners and losers will be created by the slowdown in economic activity that has accompanied the coronavirus pandemic — not to mention the political and social changes. So it is going to be important for investors to pick the right stocks, writes Tobias Levkovich, equity strategist with Citigroup.

“All of this should be welcome good news for fund managers who have almost given up, in a world that has meaningfully favored ETFs and other passive vehicles since 2010,” he writes in a Wednesday note.

Investors should be careful to avoid companies that could default on their debt, he says. Then they should look for companies with healthy dividends. He and his team screened for companies with low likelihood of default, as implied by credit-derivatives markets, and then looked for ones with higher dividend payouts. They include:

— Cisco Systems (CSCO), a tech company that yields 3.5%

— Merck & Co. (MRK), a pharmaceutical company yielding 3.1%

— Lockheed Martin (LMT), a defense company that pays a yield of 2.5%

— Caterpillar (CAT), an industrial manufacturer yielding 3.8%

— Quest Diagnostics (DGX), a medical-testing company yielding 2.1%

— Johnson Controls International (JCI), a building-safety, heating and cooling conglomerate that yields 3.7%

— Trane Technologies (TT), a company that makes building heating and cooling systems and offers a dividend yield of 2.6%

— Procter & Gamble (PG), a home-goods company that yields 2.8%

— Union Pacific (UNP), a railroad paying a 2.5% dividend

— Westrock Co. (WRK), a packaging company with a 3.2% yield.

All 10 of those companies have a low market-implied probability of default, according to Citigroup, meaning they likely won’t miss debt payments or be pushed into bankruptcy. And because their balance sheets are relatively strong, their dividends are likely safe. Those dividends could become a more important factor determining future performance, in Levkovich’s view.

“Payouts were more crucial in the past (prior to the 1980s) and could be so again,” he says in his note.

Write to Alexandra Scaggs at

© 2020 Dow Jones & Company, Inc.


Categories: Finance

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