Seeking Yield in Stocks
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
Highlights
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In 2010, the biggest individual investor money flows were out of the lowest-yielding asset classes — cash and large cap U.S. stocks — and into higher-yielding asset classes like bonds (specifically high-yield bonds) and foreign stocks.
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What we found most interesting last week was the key developments in support of an emerging investment theme: the return of the dividend.
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While U.S. investors have been reluctant to embrace dividends, there were some signs last week they are beginning to pay more attention.
The big three headlines surrounding Ireland’s debt problems, China’s actions to slow lending, and the delay in tax cut negotiations kept the U.S. stock markets volatile, but unchanged last week as individual investors stayed on the sidelines. The positive news was easier to miss. What we found most interesting last week was the key developments in support of an emerging investment theme: the return of the dividend.
Individual investors have remained net sellers of U.S. stocks during every week during the second half of 2010 despite solid gains. In 2010, the biggest individual money flows were out of the lowest-yielding asset classes — cash and large cap U.S. stocks — and into higher-yielding asset classes like bonds (specifically high-yield bonds) and foreign stocks. While investors are unlikely to pay up for growth, demand for stocks is unlikely to require lower valuations. Instead dividends may be a key theme in the stock market as investors increasingly seek yield. A steady yield is attractive for 2011 given an outlook for modest price gains coupled with above-average market volatility.
While U.S. investors have been reluctant to embrace dividends, there were some signs last week they are beginning to pay more attention.
- Setting the tone for last week was the news on the prior Friday (November 12) that Intel was raising its dividend. Intel shares jumped 1.5% that day after announcing a 14% increase in the dividend.
- On Wednesday of last week, the Federal Reserve (Fed) issued guidelines, including a stress test, for evaluating proposals by large banks to increase dividends. The Fed encouraged banks to have their capital plans filed by January 7, 2011 and indicated that it expects to provide a response to the banks by the end of the first quarter. We expect the top banks to receive regulatory approval on dividend increases sometime in early 2011.
- After the market closed on Tuesday of last week, Comerica Inc., not one of the “systemically-important” 19 banks subject to the above Fed guidelines, became the first among the large U.S. banks to raise its dividend, doubling the payout to 10 cents. The stock climbed the following day.
- After the close on Thursday of last week, Nike announced a 15% increase to the dividend, powering a 4% gain for the stock on Friday.
For most of the time since the March 2009 lows, stocks of companies that do not pay a dividend outperformed those that pay dividends*. However, as the pace of economic growth has slowed and bond yields reached new lows, the performance of dividend-paying companies has been catching up. For example, last week, the S&P 500 companies that pay a dividend outpaced those that do not.
The first quarter is typically when S&P 500 companies announce the annual increase in the dividend. This year, companies are sitting on record amounts of cash, and the percentage of their earnings they are currently paying out in the form of a dividend is below 30%, this is both an all-time low and well below the average of about 45% over the past 50 years [Chart 1]. We expect significant dividend increases favoring the stocks of dividend payers in the coming months.
As yield becomes more scarce, investors are willing to tolerate more risk to obtain it. Individual investors have shown a strong preference for yield this year which may prompt them to increasingly turn to higher-yields offered by many stocks. Of the 500 stocks that comprise the S&P 500 Stock Index, over 100 pay a yield that is higher than that of the 10-year Treasury note. The yields offered by the stocks in the S&P 500 Consumer Staples (3.2%), Telecommunications Services (5.4%), and Utilities (4.4%) sectors are considerably higher than that of the 10-year Treasury note (2.9%).
Click below to download a copy of the article
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Stock investing may involve risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, are subject to availability, and change in price.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.
High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Specific securities listed herein are not an endorsement of their product or service or a recommendation of any kind.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The S&P Consumer Staples Index is comprised of companies whose businesses are less sensitive to economic cycles. It includes manufacturers and distributors of food, beverages, and tobacco, and producers of non-durable household goods and personal products. It also includes food and drug retailing companies.
The S&P Telecommunications Index is comprised of companies that provide communications services primarily through a fixed line, cellular, wireless, high bandwidth, and/or fiber-optic cable network.
The S&P Utilities Index is comprised primarily of companies involved in water and electrical power and natural gas distribution industries.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tagged as:
Financial News,
Jeffrey Kleintop,
LPL Financial Research,
Taxes,
Weekly Market Commentary
LPL Financial Weekly Market Commentary for November 22, 2010
by Rose Greene, CFP on November 23, 2010
Seeking Yield in Stocks
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
The big three headlines surrounding Ireland’s debt problems, China’s actions to slow lending, and the delay in tax cut negotiations kept the U.S. stock markets volatile, but unchanged last week as individual investors stayed on the sidelines. The positive news was easier to miss. What we found most interesting last week was the key developments in support of an emerging investment theme: the return of the dividend.
Individual investors have remained net sellers of U.S. stocks during every week during the second half of 2010 despite solid gains. In 2010, the biggest individual money flows were out of the lowest-yielding asset classes — cash and large cap U.S. stocks — and into higher-yielding asset classes like bonds (specifically high-yield bonds) and foreign stocks. While investors are unlikely to pay up for growth, demand for stocks is unlikely to require lower valuations. Instead dividends may be a key theme in the stock market as investors increasingly seek yield. A steady yield is attractive for 2011 given an outlook for modest price gains coupled with above-average market volatility.
While U.S. investors have been reluctant to embrace dividends, there were some signs last week they are beginning to pay more attention.
For most of the time since the March 2009 lows, stocks of companies that do not pay a dividend outperformed those that pay dividends*. However, as the pace of economic growth has slowed and bond yields reached new lows, the performance of dividend-paying companies has been catching up. For example, last week, the S&P 500 companies that pay a dividend outpaced those that do not.
As yield becomes more scarce, investors are willing to tolerate more risk to obtain it. Individual investors have shown a strong preference for yield this year which may prompt them to increasingly turn to higher-yields offered by many stocks. Of the 500 stocks that comprise the S&P 500 Stock Index, over 100 pay a yield that is higher than that of the 10-year Treasury note. The yields offered by the stocks in the S&P 500 Consumer Staples (3.2%), Telecommunications Services (5.4%), and Utilities (4.4%) sectors are considerably higher than that of the 10-year Treasury note (2.9%).
Click below to download a copy of the article
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Stock investing may involve risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, are subject to availability, and change in price.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.
High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Specific securities listed herein are not an endorsement of their product or service or a recommendation of any kind.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The S&P Consumer Staples Index is comprised of companies whose businesses are less sensitive to economic cycles. It includes manufacturers and distributors of food, beverages, and tobacco, and producers of non-durable household goods and personal products. It also includes food and drug retailing companies.
The S&P Telecommunications Index is comprised of companies that provide communications services primarily through a fixed line, cellular, wireless, high bandwidth, and/or fiber-optic cable network.
The S&P Utilities Index is comprised primarily of companies involved in water and electrical power and natural gas distribution industries.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Tagged as: Financial News, Jeffrey Kleintop, LPL Financial Research, Taxes, Weekly Market Commentary