$1 trillion is a mind-numbingly-big number. It’s hard to even conceive of so much wealth.
Now try $7 trillion.
That’s the figure that jumped off the screen at me late last week. According to Bloomberg, a record $7 trillion is now hiding in money market funds.
That’s an incredible stat, especially given that the Federal Reserve has cut rates twice this year. The federal funds rate now stands at 4.75%. That’s down 75 basis points from the 5.5% peak prior to September.
Even as money market balances grow, the outlook doesn’t look good for those earning dwindling payouts and watching stocks put up a crowd-stunning performance…
In the last two years, the S&P 500 has put in a stellar 53% gain. This breakneck liftoff has caused another hard-to-swallow stat to emerge.
The S&P 500 yields a historically shallow 1.32%. That’s hardly a payout that a yield-seeker will get excited about.
However, you can find screaming deals under the surface of what looks like a low-yielding market.
Some high-quality stocks are offering compelling payouts… So compelling, history shows they rarely last long.
If you’re one of the many folks looking for an alternative to income-dwindling money market assets, you’re in for a treat.
Because today we’ll break down two data-packed signal studies on beaten-down stocks with juicy yields…
First, though, let’s isolate the ugly duckling sector of the market they live in.
Consumer Staples Stocks Are Underperforming
Back in September, we put together a great study spotlighting the rapid increase in money market assets by wealthy investors.
Essentially, the top 10% of households plowed just over $1 trillion into “safe” near-term paper. Risk-free yields of 5%-plus were hard to resist!
Our stance then was, when the cash bubble eventually bursts, it would send that cash to new income havens like dividend growth stocks.
In that piece, we highlighted Consumer Staples stocks as one of the top choices for income-hungry investors.
However, Consumer Staples stocks have lagged the market the last three months. While the S&P 500 is up 5%, Consumer Staples stocks are basically flat since mid-August.
Some of the latest down-moves were stirred after Robert F. Kennedy Jr., the nominee to run the Department of Health and Human Services, vowed to take on unhealthy foods. Given a healthy share of the Consumer Staples sector is food and beverage stocks, the group was slammed.
But the reality is that Wall Street tends to shoot first and ask questions later. Often, fears become overblown… and importantly, tee up outstanding hidden opportunities.
TradeSmith helps you spot them.
Two High-Yielding Food Stocks Due for a Healthy Bounce
You need dividends if you expect to keep up with market returns.
As we went over last August, dividends are responsible for 40% of stock market returns. Good luck investing without them!
With the understanding that dividends are important, it’s a great idea to be on the lookout for high-quality businesses that reach fire-sale prices.
Because as share prices fall, the dividend yield rises. That’s because the dividend payout stays the same, therefore making up a larger percentage of the share price.
Let’s look at two such quality businesses at fire-sale prices… and their dividend yields right now.
Up first is iconic candy and chocolate maker Hershey (HSY). Just about everyone is familiar with popular Hershey brands including Reese’s, Hershey’s, Kit Kat, Kisses, and more.
Founded in 1894, this food giant has been serving up happiness for well over a century. And business has been steadily growing.
But you wouldn’t know that looking at the stock.
In eye-popping fashion, HSY is down 13% over the past year compared to a 31% gain for the S&P 500 (SPY ETF):
To the untrained eye, that chart looks like a dying business. But it isn’t.
In 2021, revenues stood at $8.97 billion and are set to reach $11.16 billion in fiscal year 2024. Over the same period, net income has grown from $1.47 billion and is estimated to hit $1.84 billion.
Yes, the confectionery business is alive and well. And with healthy margins, the Hershey company has rewarded shareholders with dividends for decades. The current forward yield sits at an attractive 3.22%.
And there’s reason to believe the company will bump the payout in the future. Just review the last 10 years of dividend growth rates, and you’ll see that management is all about returning capital to investors:
But what makes Hershey an interesting asset today comes down to the current rich payout.
A forward yield of 3.22% rarely comes along. In fact, a similar yield or higher has only occurred 30 times the last 30 years.
Using monthly closing data, I went back and isolated all instances when HSY had a forward yield of 3.1% or higher, and here’s what happened next:
- 12 months later, HSY jumped 17.7% on average
- And 24 months later, HSY shares flew 45%
And every timeframe above beats the long-term annual return of the S&P 500 of about 10%.
That’s a sweet return profile if you ask me!
But I don’t want to stop here. If you’re about to ditch your money market fund, I want you to have choices of where to go next!
The No. 2 dividend growth opportunity is with beverage and snack maker PepsiCo (PEP).
Like Hershey, PepsiCo shares have suffered with Trump administration fears, falling 3.47% on a one-year basis… much of the steep decline happening recently:
But again, we’re only interested in high-quality businesses that we believe are unfairly punished.
With 2024 estimated to show $92.2 billion in sales for PepsiCo, and net income of $11.2 billion – this is clearly a solid business.
Like Hershey, PepsiCo management decided a long time ago to share profits with investors in the form of dividends.
Here’s the 10-year annual dividend growth for PepsiCo:
The latest drawdown in the shares have sent the PEP forward dividend yield to 3.45%… making it historically elevated.
Here’s why this matters…
Over the past 30 years, when PepsiCo shares traded at a 3.3% forward yield or higher:
- Six months later, it saw average gains of 14.7%
- 12 months later, it returned 24.1% gains
- And 24 months later, shares vaulted 34.6%
And once again – all of these historical returns beat the long-term average of the S&P 500.
If you think Consumer Staples companies can’t offer upside, think again.
Every now and then, investor sentiment pushes stocks to extremes, unlocking hidden value. That’s what I see when looking at the evidence of Hershey and PepsiCo shares.
At TradeSmith, we don’t have crystal balls… we have cutting-edge data that helps investors see what others miss.
Huge money market balances will surely find their way into the stock market eventually.
So don’t be surprised if these sweet, juicy yields fizzle out in the coming months and beyond.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
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Source: TradeSmith