Dividends hold an interesting place in the current market environment. On the one hand, their yields are looking more attractive after the big fall in bond yields. However, some think the bond rally is very fragile and that it will either fall in a big way or at least stall, in which case the outlook for dividend stocks is bleak. So how to handle the environment? One tip is to buy dividend stocks with the fastest dividend growth, not the highest yield, as they have been fairing the best and will likely be the most resistant to rate fluctuations. One research analyst in the space summarized the situation this way, saying “Companies exhibiting stronger earnings growth to support regular dividend hikes have been in greater demand than those more value-oriented ones offering higher income streams”.
FINSUM: Those with the best trending yields will likely be more defensible than those with higher but more stagnant yields.
Over the last few weeks, value stocks have been seeing a comeback. The Russell 1000 Value is up 4.15% this month versus just 1% for the corresponding growth index. This has proved a big boost to dividend paying stocks as they tend to be the most undervalued. That means investors are not only seeing good payout, but also nice capital appreciation. According to Evercore ISI, “The rebound in Value represents a buying opportunity [for income investors] following the rout in August”. Interestingly, the stocks with the lowest dividends have been outperforming higher payers.
FINSUM: If you think rates are headed lower than it is definitely a good time to buy dividend payers, as they will offer nice relative yields and good capital appreciation.
It is a rough time to find income. The big move downward in yields has crimped payouts to a significant extent. So where can investors find good yield without taking excess risk? Treasury yields are paltry, most stocks aren’t offering much, and high yield bonds look vulnerable in the context of a possible recession. So where can investors look? The answer might be RMBS, or residential mortgage backed securities, especially those unbacked by federal agencies. These are offered by a number of high profile funds, such as the Pimco Mortgage Opportunities and Bond Fund (PMZIX), or the Metropolitan West Unconstrained Bond fund (MWCIX). Yields are typically between 3% to 5%, and critically, the underlying return is linked to the health of the US consumer, a group that has been doing very well despite broader macroeconomic headwinds.
FINSUM: We like this call given the housing market is not broadly feeling bubbly and consumers seem to be in quite good shape.
Advisors and their clients love dividend stocks. They have some of the stability and income of bonds, but also all of the capital appreciation characteristics of equities. However, advisors may want to stop buying them, argues Barron’s. The reason why is that most of the big fall in bond yields is likely priced in, which means likely all of the gains for dividend stocks have already been made and there is likely little appreciation left. Accordingly, the path of least resistance is probably down.
FINSUM: The big fall in bond yields was bullish for dividend stocks as they get comparatively more attractive as yields fall. However, if the fall in yields stalls, it is hard to imagine dividend stocks could go anywhere but downward.
Vanguard made some headlines earlier this month when it re-opened one of its long closed-to-new-investors dividend funds (VDIGX). However, it was not the only fund to reopen, as a whole suite of Vanguard dividend funds are once again available. The funds come in two flavors, active or passive. VDIGX is actively managed and has the best one-year return, but it is almost the most expensive. Check out the firm’s VIG fund (Dividend Appreciation), which has a 11% one-year return and charges only 6 basis points.
FINSUM: This whole suite of funds has a good track record and some have characteristically low fees.
Name the two main factors which drove this decade-long bull market. Ours would be the Fed’s easy policy, and huge levels of corporate buybacks. Well, that second one, which has inarguably been at least a core pillar of the bull run, is ending. Companies are pulling away from share buybacks, lessening one of the big price drivers for the market. Buybacks have slipped alongside the market’s trouble, as companies are no longer stepping in to buy shares, sending buybacks to their lowest level in 18 months.
FINSUM: Do you remember the earnings recession that occurred for a few years during this bull market? Buybacks are what kept prices afloat.