BALTIMORE ( Stockpickr) -- With stocks correcting for a second straight week, investors are turning to the safety blanket of income stocks. After all, when capital gains are eroding, dividend payouts can be the only form of returns that investors see for a while.
So it shouldn't come as a big surprise that high-yield assets are getting attention this month.
And with interest rates showing little chance of rising thanks to plummeting inflation and a strong dollar getting extra buying power from the recent gutting of oil prices, dollar-denominated income stocks are the place to be as the calendar gets ready to flip to 2015. But that doesn't mean you should chase anything with a fat dividend payout here; instead, we're turning to the charts for a technical take on which high-yield names are showing high-probability trades in this environment.
That's why, today, we're taking a closer technical look at five stocks with a dividend payout above 3%.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Up first is Duke Energy (DUK - Get Report) , the $58 billion power utility. Utilities and dividends go hand in hand, so it's no surprise that Duke and its 3.9% payout are benefitting from yield-chasing this December. But what is surprising is just how well the price action is holding up on Duke's chart. Shares are within grabbing distance of a breakout in spite of yesterday's correction.
Duke is currently forming a rounding bottom pattern, a price setup that looks just like it sounds. The pattern indicates a gradual shift in control of shares from sellers to buyers -- and it triggers a buy on a push above resistance up at $83. Since the last time we looked at the setup in DUK, shares have continued to consolidate under that $83 price ceiling. The fact that it hasn't closed above $83 adds extra emphasis to the buy signal if and when it finally does.
The side indicator to watch in DUK is relative strength, which has been in an uptrend since the summer, an indication that this stock is outperforming the broad market in good times and bad ones. In fact, the relative strength uptrend began accelerating this fall. As long as that relative strength uptrend remains intact, shares of Duke Energy should keep outperforming the S&P 500.
Tupperware Brands Corp.
Mid-cap home and beauty stock Tupperware Brands Corp. (TUP - Get Report) hasn't had the same upside action in 2014. In fact, since the calendar hit January, shares of TUP have fallen more than 33%, underperforming the broad market by a huge margin. But long-suffering TUP shareholders could finally be in for a reprieve this winter -- shares are starting to show signs of a bottom.
TUP is currently forming the early stages of a double bottom pattern, a price setup that's formed by a pair of swing lows that bottom out at approximately the same price level. The buy signal comes on a push above the peak that separates those two lows; for TUP, the price to watch is $67.50. If shares can catch a bid above that $67.50 level, then we've got a buy signal in play.
It's worth noting that a breakout above $67.50 in TUP would also coincide with a breakout above the downtrend line (dashed in grey on the chart above), which has defined the downtrend in Tupperware since July. There's clearly been a lot of selling pressure in this stock year-to-date, but with shares looking oversold, a breakout above $67.50 could come with some quick snapback gains.
Currently, Tuperware pays out a 4.35% dividend yield.
We're seeing a very similar price setup in shares of handbag maker Coach (COH) . Like Tupperware, Coach has been in selloff mode for most of the year, dropping more than 37% since the start of 2014. It also pays a hefty dividend yield: 3.85% at current price levels.
Coach has been consolidating sideways for the last five months, bouncing around in a rectangle pattern. The rectangle setup is formed by a pair of horizontal resistance and support levels that basically "box in" shares between $33 and $37. Consolidations like the one in COH are common after big moves (like the descent that started in January); they give the stock a chance to bleed off oversold momentum as buyers and sellers figure out their next move.
From here, a breakout above $37 is the next buy signal on the way up -- a violation of support at $33 means more downside suddenly looks likely. If shares can close above $37, I'd recommend parking a protective stop on the other side of the setup at $33.
You don't have to be an expert technical trader to figure out what's going on in shares of beverage giant Coca-Cola (KO - Get Report) -- instead, a quick glance at the chart should tell you pretty much everything you need to know about this $178 billion soda maker. The price action in Coke is up and to the right, and that could be a good thing for buyers this week.
Coke has been bouncing its way higher in a well-defined uptrending channel for all of 2014. Put another way, every test of that lower trendline has provided traders with a low-risk buying opportunity this year. And as shares power towards their fifth test of support this week, it makes sense to buy the bounce.
Waiting for a bounce is important for two key reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring KO can actually still catch a bid along that line before you put your money on shares.
Coca-Cola's uptrend is in make-or-break mode this week, and that's why reacting to the bounce (and not trying to predict it) is so crucial here.
Last up is FirstMerit Corp. (FMER) , a mid-cap banking stock that's good for a 3.6% dividend payout at current price levels. Like the last few names we've looked at today, FMER is a potential reversal trade -- shares have been selling off for most of the year, but the price action is showing signs of a bottom. Here's how to trade it:
FMER is currently forming an inverse head and shoulders pattern, a bullish reversal setup that indicates exhaustion among sellers. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal came on a breakout above the pattern’s “neckline” level, which is currently at $18.75.
Momentum also looks bullish in FMER here -- our 14-day RSI line has been making higher lows during the pattern, even while price was digging out a lower low back in October. Since momentum is a leading indicator of price, a breakout above $18.75 should be a good buying opportunity to become a buyer. If you decide to be one of them, I'd suggest keeping a stop at the 50-day moving average.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in the names mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory that returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji