No Place to Turn With Stocks and Bonds Both Down? JPM Has a Solution

Both the stock and bond markets are in the dumps, a major bummer for investors. The S&P 500 is down this year by 9.8% and the Bloomberg U.S. Aggregate Bond Index is off by an almost identical 9.9%.

Typically, when stock prices go down, bond prices go up. But the Federal Reserve’s rate-hike plans have thwarted that neat little dynamic, leaving investors scrambling. So J.P. Morgan’s U.S. high-grade strategist, Nathaniel Rosenbaum, and his team have concocted a strategy to try getting around this problem.

When bonds had lower yields, some investors sought to make up the difference by buying high-dividend stocks from solid companies. Because the stock market was booming then, this tactic had a double advantage: investors could earn decent income while their shares appreciated. Those days are over, obviously.

Now, JPM’s idea is to stay with the same trustworthy companies but swap the companies’ stocks for their bonds, which are yielding better lately as rates climb. The thinking is that the bond prices won’t fall too much—what JPM calls “downside protection”—and the payouts will be even better than before.

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As the JPM report puts it, “when yields were low, investors occasionally looked to high dividend paying equities as yield with growth upside. Fast forward to today and one can effectively make the reverse argument.”

JPM screened for quality investment-grade bonds that significantly outyielded their equities, from companies whose stocks paid dividends of above 3%. Another requirement: The stocks must be up year-to-date, which says something about resilience in 2022’s lousy market. “Protecting these gains by rolling into HG bonds may be advantageous in certain cases,” the study says, referring to “high-grade” paper.

Helpfully, JPM has a list of these worthy investments. The 66-name roster contains companies that include energy, pharma, health, utilities, real estate, consumer goods, and media.

First on the list is Paramount Global, formerly ViacomCBS, up 1% this year. It had been higher until recently, but revenue fell short of analysts’ estimate for its most recent quarter and the stock dipped. Nonetheless, the company’s 3.2% dividend yield is overshadowed by its bond yield, 5.9%.

No. 2, Kohl’s, the department store chain, has held up fairly well in the pandemic, with the help of a partnership with Amazon. Takeover talk has helped spur the stock, with the latest suitor being rival JCPenney. But even before the merger excitement, the stock has done well for some time. The stock is up 20% this year, with a 3.4% dividend yield and a 5.9% bond yield.

NiSource, a public utility and the third company on the JPM list, has similar comparative metrics: 3.3% and 5.6%. The stock is ahead 6% in 2022.

Following these picks are medicine maker Bayer, American Electrical Power, Kilroy Realty, and Cardinal Health.