It’s time to consider quality and dividend growth stocks, instead of traditional defensives, to deal with greater volatility ahead, according to BMO Capital. The market is coming off its worst day since June 2020, with the S & P 500 dropping more than 4% on Tuesday on the back of hotter-than-expected U.S. inflation data. Stocks have been under pressure all year as fears of high inflation, rising interest rates and an economic downturn have traders dumping equities. Those who are sticking with stocks are are pivoting more to defensive sectors, such as consumer staples and utilities, to contend with the uncertainty. Still, BMO Capital has some other recommendations for investors to protect and grow their portfolios. “[We] think there are better ways to combat price swings and volatility than piling into defensives,” BMO Capital’s Brian Belski wrote in a Tuesday note. “Indeed, we prefer to focus on High Quality and Dividend Growth, which have historically registered solid returns during elevated and rising volatility levels, and have done a better job at providing downside protection during market declines, while also participating in price upside,” Belski added. The strategist pointed to the historical outperformance in high quality and dividend growth stocks during market routs. According to monthly returns since 1990, when the S & P 500 fell more than 10% year over year, BMO’s high quality and dividend growth screens fell just 6.4% and 1.1%, respectively. In comparison, consumer staples and utilities dropped by 9.7% over the same time period, and the broader market declined 21.4% on average, according to the note. At the same time, these stocks have fundamental qualities that are consistently attractive for long-term growth, according to the firm. “High Quality and Dividend Growth exhibit higher ROE, better LTM earnings growth, and superior dividend growth on both a trailing and forward basis when compared to their defensive counterparts, characteristics that we believe are important when it comes to the consistency of longer-term performance,” read the note. BMO screened for high quality stocks in the S & P 500 that have low levels of earnings per share growth volatility relative to the broader market, high levels of cash and strong return on equity. The firm also searched for stocks that have a higher dividend yield than the benchmark index and no dividend cuts over the past five years. Here are 10 high quality and dividend growth names. Costco is a high quality pick that has outperformed this year, off just about 10%, compared with the 17% drop in the S & P 500. The retail stock is up 6.6% this quarter. High-quality name Texas Instruments is about 12% lower this year. The semiconductor stock is also outperforming the broader market this quarter, up 7.4% in that time. ConocoPhillips is a dividend growth pick highlighted by BMO. The energy stock is up 60% this year on the back of higher oil and gas prices, and is up 29% this quarter alone. Other names included in this list are Microsoft , Cognizant Technology , Discover Financial Services and TJX Companies .
