The market closed with mixed yesterday, as it’s still under pressure due to the US Debt-ceiling talks as many investors are waiting on the sidelines for a resolution. However, just because some are on the sidelines doesn't mean there aren’t opportunities on the field. Smart money will invest where opportunities exist. For example, in this current environment where investors are getting defensive, wise investors tend to look at dividend yields.
What is dividend yield?
The dividend yield is a ratio that indicates the income provided by the company to its shareholders as a distribution of its earnings expressed in percentage form. This gives investors a quick way of identifying the potential income they will get once they buy the stock. However, a higher dividend yield doesn't automatically mean it's a buy. Investors can add additional criteria like checking indicators like RSI to see the company's trend.
What is RSI?
RSI, or the Relative Strength Index (RSI), on the other hand, is a technical momentum oscillator calculated based on the intensity of recent price movements. RSI is displayed on a scale of 0 to 100, where 100 is the most overbought and 0 is the most oversold. An RSI indication above 70 is considered overbought, 50 is considered neutral, and below 30 is considered oversold. Stocks that trade above 50-70 are considered bullish, and those trading below 50-30 are considered bearish. That said, the RSI shouldn’t be confused with a buy indicator — rather, it’s a starting point. Think of it like one large piece of a puzzle.
Here are 3 dividend stocks that are trading in the bullish RSI territory.
International Business Machines (IBM)
Annual Dividend Yield: 5.22%
RSI: 56.60
International Business Machines Corporation is a technology company that provides hybrid cloud and artificial intelligence (AI) solutions. It offers integrated solutions and products that use data and information technology (IT) in industries and business processes. Its segments include Software, Consulting, Infrastructure, and Financing.
- Software - Consists of two business areas: Hybrid Platform & Solutions, which includes software to help clients operate, manage, and optimize their IT resources and business processes within the hybrid, multi-cloud environments, and Transaction Processing, which includes software that supports clients’ mission-critical, on-premises workloads in various sectors.
- Consulting - engages in business transformation, technology consulting, and application operations.
- Infrastructure - engages in hybrid infrastructure and infrastructure support.
- Financing - engages in client financing and commercial financing business.
IBM’s annual dividend yield is currently at 5.22%, which is rare for companies of its size and history. IBM has a 5-year dividend growth of 11.69%. The company is set to pay its 2nd interim dividend this June 10th. IBM has continuously increased its dividend for 27 years. The company is part of the coveted Dividend Aristocrats list of high-quality dividend companies.
Did we just bottom out?
IBM has been trading in a downward-sloping channel since last year. Now that prices have broken out of its channel, the next question is whether it's confirmed. Prices gapped up after the breakout, but no signs of follow-through are in sight, even with RSI already in bullish territory. Investors planning to buy into IBM should wait for confirmation of the breakout to minimize risk. With low volume since the breakout, it's best to trade this with a tight stop in mind.
Leggett & Platt, Incorporated (LEG)
Annual Dividend Yield: 5.41%
RSI: 54.92
Leggett & Platt, Incorporated is a diversified company that manufactures and sells various home, automotive, and textile products. The company was founded in 1883. Currently, it is headquartered in Carthage, Missouri, U.S.
The company’s products are divided into three sections:
- Bedding Products section offers cutting-edge sleep solutions like bed springs, foam, customizable bedding, machinery, etc.
- Specialized Products section designs and sells fluid conveyance systems, hydraulic cylinders, aerospace tubing, and seating support and comfort systems for automobiles.
- Furniture, Flooring & Textile Products section offers innovative and new textile solutions, floor cushions, acoustic systems, and various customizable furniture.
LEG has an annual dividend yield of 5.41% and a 5-year dividend growth rate of 22.54%. The company announced its dividend for June last May 4th and will be paid on July 14, 2023.
LEG has continuously increased its dividend for 52 years, making it part of the elite Dividend Kings.
Breakout or Fakeout?
LEG is trading in a tight upward channel towards its resistance at the $33.60 area. Its previous retest around it last April saw traders selling the stock aggressively, but prices remain in its channel direction. The RSI shows a contraction in its movement but is still in bullish territory. It's a matter of time before we see prices breaking out and confirming that the bulls are here to stay or that we will head back to their lows.
Universal Corporation (UVV)
Annual Dividend Yield: 5.96%
RSI: 52.81
Universal Corporation is a tobacco leaf supplier company that operates in 2 main segments: Tobacco and Ingredients Operations. The company supports farmers of different origins by contracting, offering agronomy support, and financing. UVV uses a plant-based ingredients platform to provide vegetable and fruit-based ingredients, botanical extracts, and flavorings to human and pet food markets. UVV’s segment functions are:
- Tobacco Operations – includes contracting, procuring, financing, storing, and shipping leaf tobacco to manufacturers of consumer tobacco products.
- Ingredients Operations – provides a range of plant-based ingredients for both human and pet consumption to its business-to-business customers.
Universal Corp has an annual dividend yield of 5.96% and a 5-year dividend growth rate of 46.01%. Based on its historical disclosures, the company is expected to declare its next dividend by the last week of May. UVV has increased its dividends for 51 years and is on the elite dividend kings list.
Should we get ready for a retest of the resistance?
UVV has returned to its previous range of $51.71-$55.74 and retested its strong support at $51.71. With RSI now in bullish territory, investors that picked up UVV when it bottomed out last March may continue to hold and sell at near-term resistance or wait for another breakout to test $57.85. Investors planning to trade the move toward the resistance can wait for UVV to provide buy signals to get it at a better price.
Final Thoughts
Combining different data and indicators allows users to easily identify potential opportunities for short-term gains or even find companies with long-term potential regardless of the market. However, investors must conduct due diligence to ensure these companies still fall under their long-term goals and avoid unnecessary risk. Always remember that the market is always in constant motion that may change direction at any time.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
