By Michael Wursthorn
A plunge in bond yields has left investors with few alternatives
to stocks.
The latest flare-up in trade tensions has quickened investors'
flight to haven assets, pushing bond yields down to their lowest
levels in years. Wall Street analysts say the pullback in yields,
along with a new phase of monetary loosening by central banks
around the world, should give investors a new rallying cry for the
second half of the year: "There is no alternative" to stocks, known
as the Tina effect.
Nearly 60% of stocks in the S&P 500 offer a dividend yield
of at least 1.7%, according to FactSet, better than the 1.640%
yield where 10-year U.S. Treasurys settled Monday. AT&T Inc.,
cereal maker General Mills Inc. and memory chip company Western
Digital Corp. are among the highest-yielding -- and best performing
-- stocks in the index this year. Each has dividend yields of at
least 3.6%, while yields across the broad index average about
2%.
The percentage of outperformers is among the highest of the
more-than-a-decade-old bull market, says Keith Lerner, chief market
strategist at SunTrust Advisory Services. He added that, on
average, about 17% of S&P 500 stocks have carried dividend
yields exceeding those of 10-year Treasurys since 1990.
The allure of steady, income-generating stocks is expected to be
a stabilizing force for major indexes in the months to come.
"This is a hard period for most investors to navigate through,"
says Brent Schutte, chief investment strategist at Northwestern
Mutual Wealth Management. "But stocks are supported by low bond
yields as long as we don't have a recession."
A mix of trade tensions and fears that growth is slowing around
the world have dented the stock market's rally. The S&P 500 has
stumbled 3.3% so far this month, knocking its year-to-date gain to
15%. Investors, meanwhile, have stepped up their flight to haven
assets, pushing bond yields down.
During the pullback, analysts at UBS Group AG and Wells Fargo
Investment Institute, among other firms, have been urging investors
to buy dividend-generating stocks, especially those that are less
susceptible to trade tensions.
Dividends pad stock returns and offer investors a steady stream
of income. Taking dividends into account, an S&P 500 index that
measures total return is down just 2% this month and remains up
nearly 18% for the year.
Dividend-paying stocks can help insulate investors from the
worst of a pullback. When the S&P 500 fell 6.6% in May
following renewed trade anxieties, a UBS portfolio including Home
Depot Inc., McDonald's Corp., JPMorgan Chase & Co. and other
dividend-paying stocks with below-average exposure to China fell a
more modest 3.7%.
Investors, however, need to consider more than just a company's
share payout, according to analysts. Some of the
highest-dividend-yielding stocks are among the market's worst
performers this year. In some cases, yields are higher because
stock prices have fallen. Too high of a yield can be a sign of
distress. The dividend yield of the telecom company CenturyLink
Inc. stands at 9.3%, but shares have slid 26% in the midst of
broader turmoil for telecoms.
S&P 500 energy stocks carry a yield of 3.8%, the highest of
the broad index's 11 major sectors. But worries of a supply glut
have hurt shares of energy stocks this year. The sector has slid
8.9% since the end of June, cutting its year-to-date gain to
1.3%.
The disconnect between dividend yields and bond yields can be a
factor of tepid economic growth, and it can spill over into the
stock market. Take Japan, for example. The Nikkei 225 has had a
higher dividend yield than what is offered by 10-year Japanese
government bonds for more than a decade, but modest economic growth
has weighed on returns. The S&P 500 has risen more than 700%
over the past 30 years, compared with a 40% contraction in the
Nikkei.
"Markets have to be very confident about the future, as well as
the stability of a dividend going forward," says John Vail, chief
global strategist at Nikko Asset Management.
Investors should seek companies that have solid growth
trajectories and pay healthy dividends, rather than those that
offer the biggest payouts, says Mr. Vail. Utilities and
consumer-staples companies, for example, pay some of the highest
dividends, but those companies have been fighting pricing pressures
and tend to grow more slowly than those in the technology and
communications sectors.
Technology companies in the S&P 500 sport a dividend yield
of 1.4% and have risen 25% this year, as investors concentrate on
companies with the potential to expand sales and profits.
Apple Inc. carries a 1.4% dividend yield, matching the broader
sector's average, and is up 27% for the year (nearly 29% on a
total-return basis). Several companies that pay richer dividends
are doing just as well, if not better. Semiconductor company Lam
Research Corp. has a 2.3% yield and is up 44% this year, while
International Business Machines Corp.'s 4.6% yield juices the
computing giant's total return to 22%, compared with 18% on the
basis of price change.
At the same time, stock valuations have improved as major
indexes pull back from their July records -- an enticing factor for
price-conscious investors who thought shares of many companies were
getting expensive.
The S&P 500 is trading at 16.3 times its earnings over the
next 12 months, down from more than 17 times in July, according to
FactSet. Analysts at Goldman Sachs and other firms say the broad
index could comfortably reach a valuation of 18 times by year-end,
as long as interest rates fall or remain stagnant.
"Dividend yields are going to come into play for people looking
to nibble at opportunities in the stock market," says Mr. Lerner.
"Even if you're more bearish, then equities that pay dividends are
going to help buffer portfolios during periods of uncertainty."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
August 13, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Home Depot (NYSE:HD)
Historical Stock Chart
From Aug 2024 to Sep 2024
Home Depot (NYSE:HD)
Historical Stock Chart
From Sep 2023 to Sep 2024