JPMorgan sees an opportunity in unloved, low-volatility stocks that pay dividends. These defensive stocks, including companies like Coca-Cola and Procter & Gamble, are expected to perform well as bond yields stabilize. With attractive entry points and potential for upside, these dividend payers offer investors a way to benefit from market resilience.
JPMorgan analysts are flagging a compelling investment opportunity in a segment of the stock market that has been overlooked but offers the advantage of dividend payouts: low-volatility stocks. These companies, typically found in defensive sectors, are poised to benefit as bond yields begin to stabilize.
Mislav Matejka, JPMorgan's head of global and European equity strategy, notes that low-volatility stocks in the U.S. and Europe have underperformed recently, moving counter to rising bond yields. This group includes companies in consumer staples, healthcare, utilities, insurance, and industrials, characterized by their stable price movements and consistent dividend payments.
The bank's research highlights an inverse correlation observed year-to-date between U.S. low-volatility equities and bond yields. Specifically, U.S. low-vol stocks have declined by 6% since the onset of the Middle East conflict, while bond yields have climbed by 55 basis points. However, recent dips in Treasury yields, spurred by hopes for a peace deal in Iran, suggest a potential shift.
Matejka suggests that if bond yields continue to stabilize, low-volatility stocks could see increased investor interest, mirroring their performance earlier in the year when yields were falling. Even if yields spike towards 5% on the 10-year Treasury, these stocks may also begin to trade relatively better, breaking their inverse correlation.
JPMorgan anticipates lower yields in the medium term, making the "low vol trade" attractive due to its current entry point and resilience across various macroeconomic scenarios. The strategy is not contingent on a broad market downturn, as low-vol stocks have historically outperformed even in rising equity markets.
The firm's low-volatility index includes several stocks with an "overweight" rating. Among them are:
- Coca-Cola (KO): Offers a 2.6% dividend yield and has remained positive year-to-date. Despite recent price stagnation, the company beat first-quarter earnings estimates, raised its full-year guidance to 8%-9% EPS growth, and expressed confidence in navigating cost uncertainties. Analysts see nearly 9% upside potential.
- Rollins (ROL): A pest control company with a 1.37% dividend yield. Despite a nearly 11% drop in its stock price over the past three months, analysts have given glowing reviews to its investor day, citing a strong go-to-market strategy and execution. FactSet data indicates nearly 22% upside potential.
- Procter & Gamble (PG): Yields 3.01%. Though shares have fallen about 13% in the last three months, the consumer goods giant surpassed earnings and revenue expectations. The company is awaiting its July earnings report to provide fiscal 2027 guidance due to market uncertainties. Analysts hold an average "overweight" rating, projecting about 15% upside.
These selections represent JPMorgan's strategy to identify resilient companies that not only offer stability but also provide income through dividends, making them attractive in the current market environment.
