Displaying items by tag: yields
The market is split over dividend stocks. On the one hand, about half the market thinks the huge wave of dividend cuts are over and that most of the damage has been done. One the other, many worry that not all the deleterious effects of COVID have manifested themselves on corporate behavior and that further cuts may still be in the works. The overall picture seems to be one where caution is due given the big jump in valuations and the continued possibility of further cuts. For instance, bank and credit card companies look likely to cut further as high unemployment leads to worsening credit quality and more delinquency. Wells Fargo just announced a dividend cut, for instance.
FINSUM: Our thinking here is to be careful. Even if the economy does not have another lockdown, the full effects of this recession may take a little time to fully show themselves in dividend cuts.
For those interested in dividend investing, REITs have always been a key area. While rate sensitive, they can also provide strong and steady income streams. REITs may seem particularly risky as a whole right now because of the ongoing reckoning in commercial real estate as a result of the pandemic, but there are still some good opportunities to be had. The reason why is that REIT dividends, which have fallen 20% since the beginning of COVID, have likely hit their floor. JP Morgan says “that the current 3.5% dividend yield for the REIT group should be sustainable at this point.” Some of JPM’s best REIT picks right now include Brandywine Realty Trust (BDN, yielding 7.6%), Four Corners Property Trust (FCPT, 5.5%), Welltower (WELL, 5%), Medical Properties Trust (MPW, 6%), and W.P. Carey (WPC, 6.3%).
FINSUM: As obvious as it is to say, in our view, the key to REITs right now is the area of real estate they focus on. Mall REITS—probably not, storage/industrial RETS—much better.
While some are saying that we are in “TINA” mode with equities (i.e. there is no alternative), high yield bonds have been seeing a big influx of demand. Because dividends are drying up in the stock market, high yield bonds are becoming increasingly attractive, and Bank of America thinks they are going to do well. They point out that yields in some bonds are much higher than similar yields on equities in the same sector and they expect spreads to tighten in the coming quarter. “While the easy money was last quarter, we still see many tailwinds to nudge high-yield spreads tighter in Q3...Markets should be treated to plenty of positive data surprises now that economies are exiting their lockdown hibernation…an essential ingredient for leveraged credit to perform.”
FINSUM: This seems like a reasonable call, but we think the positive data surprises might be a stretch. That said, yield-hungry investors will likely keep the high-yield space humming along.
There is alarm growing among muni bond investors as credit quality continues to deteriorate. During COVID there has been a widening gap in pension deficits among municipalities, and investors are keeping a close eye because it is leading to deferred pension payments. This is troubling for a number of reasons. Firstly, it digs municipalities into a bigger hole because they must pay interest on deferred payments; and secondly, it spooks bond markets and makes it harder for them to access liquidity. In other words, deferred pension payments, such as the nearly $1 bn one New Jersey elected to do in May, dig muni issuers into a deeper and deeper hole.
FINSUM: Pension recipients are very likely to be considered senior to bondholders, so this is a very alarming situation for investors.
Big debt investors are pouring dollars into risky debt markets and products, such as CLOs and their subprime-backed assets. Why you may ask? (as anyone might right now) The answer is that the riskiest borrowers are surviving this downturn much better than anyone expected. Spreads between subprime-backed products and US Treasuries have narrowed sharply, while new deals have seen big demand. According to an analyst at Loomis Sayles “What is surprising is how strong credit performance has been … Fiscal policy is really keeping the subprime borrower afloat”.
FINSUM: Regardless of whether or not you are involved in this market, it is good news that the demand for these securities is actually being driven by fundamentals. It is both a sign of economic resilience, and also of market rationality.