'GARP' plus dividend growth: BMO says investors should use this two-pronged strategy to navigate volatile markets

Published Mon, Mar 27 202310:41 AM EDT

With markets increasingly volatile, BMO Capital Markets thinks investors should turn to a two-way strategy that provide returns and protection at the same time. Investors need to "be more nimble and selective in their investment approach to outperform," BMO said in a March 17 note, as the U.S. stock market experiences big intraday swings. The S & P 500 gained more than 1% last week, but it wasn't a smooth ride. The broader market index fell more than 1% on Wednesday after the Federal Reserve raised rates again and reiterated it is steadfast in its fight against inflation. On top of that, the Fed is trying to maintain stability in the U.S. banking sector. Given this uncertain backdrop, BMO suggests relying on a dual-tiered approach encompassing growth at a reasonable price strategy, or "GARP," and a dividend growth barbell. GARP simply refers to picking companies that have proving they can provide consistent earnings growth, and also filters out investments in firms that have high valuations. Meanwhile, a barbell investment strategy gives investors ample exposure to higher-risk equities while also providing the safety of low-risk and secure return investments. The barbell is thus balanced against one side being overweight when investors distribute such investments accordingly. The firm compiled a list of outperform-rated stocks that fit into the GARP or dividend growth themes. BMO sorted the stocks using the following parameters: GARP-themed stocks must be included in the S & P 500, with an expected next 12 months median above the S & P 500, forward EPS growth over the median value of the S & P 500 and a forward price-to-earnings growth ratio less than the S & P 500's. Dividend growth stocks also must be in the S & P 500, have without cuts to dividends in the last five years, the most recent dividend per share growth above the S & P, a present dividend yield that's greater than the S & P, maintains a free cash flow yield that's more than the dividend yield, and a dividend payout ratio that's lower than the S & P 500. Here are some of the names that made BMO's list. PayPal made the cut for BMO's GARP list. The stock has gained 3.7% this year. PayPal is also facing a shakeup with changes to the company's leadership, with CEO Dan Schulman expected to step down at the end of the year . The firm's chief financial officer Blake Jorgensen also stepped down earlier in March. Also on the list is Broadcom , a large producer of semiconductors and a heavyweight in the telecommunications industry. The stock has climbed 13.4% this year. The company on March 2 reported fiscal first-quarter earnings and revenue that beat analyst expectations. Broadcom's fiscal second-quarter guidance also came in above estimates. AVGO YTD mountain Shares of Broadcom have gained nearly 14% so far this year. CF Industries and ConocoPhillips were also highlighted by BMO under their dividend growth strategy. CF Industries recently completed a deal with Australia's Incitec Pivot for the Waggaman ammonia production complex in Louisiana for $1.6 billion. The firm also said it planned to realize carbon capture in storage at the complex in the future. Year to date, the stock has slumped more than 19%. Meanwhile, ConocoPhillips took steps to increase its exposure to liquefied natural gas on Monday, after announcing an increases stake in Australia Pacific LNG for $500 million. The increase brings Conoco's position up to 2.49%. ConocoPhillips shares have struggled in 2023, falling more than 18%. Other stocks highlighted by BMO include DuPont De Nemours , Analog Devices , Goldman Sachs and food-processor Sysco. "Our work shows that this type of barbell strategy has produced an attractive long-term return and risk profile relative to the overall market as indicated by its higher CAGR and Sharpe ratio," BMO said. "We also found that a GARP + dividend growth barbell has historically been well-suited for stock picking environments, such as those periods when earnings growth and valuations among companies are highly dispersed (like they are currently)." — CNBC's Michael Bloom contributed reporting.