Dividends Beat Bonds
Many factors influence the prices of stocks, yet from today’s financial news, one could conclude that they are dominated by the price of oil. Oil prices influence all of us and it makes for more dramatic headlines than announcing that yields declined [again] on Treasury bonds. A year ago, the headline financial news centered on predicting how soon the Federal Reserve would raise interest rates. The Fed left rates low and the financial talking heads shifted their rising rates predictions to this year until the oil price crash took over the headlines.
Meanwhile, other central banks are taking steps such as buying bonds and pushing fiscal stimuli, trying to boost the halting pace of their economic recoveries. Such measures demand low rates as tumbling oil prices add deflationary forces.
Fears over slowing growth in Europe and China combined with a stronger U.S. dollar also force rates down as scared investors cling to the apparent safety of U.S. bonds. All this results in remarkably low rates, emphasized by the benchmark 10-year U.S. Government note, which currently trades at a record low of 1.86%. (It was 2.16% a month ago and 2.83% a year ago.)
Corporate earnings continue to grow overall at a fast canter with dividends keeping pace. The result is that the dividend yield on the S&P 500 has moved above the benchmark 10-year Treasury for just the fourth time in over fifty years.
This is a logical bullish signal for U.S. stocks, with dividends alone exceeding bond yields before adding any opportunities for capital appreciation. To the extent this disparity stems from fears, investors should remember Mr. Buffett’s rule, “Be fearful when others are greedy and greedy when others are fearful.”
The record backs this up. A year after such a dividend crossover in 1962, stocks were up 33%, in 2008, ahead 35% and, most recently in 2011, they gained 25%. The average was 31%.
With market indices near record highs, we can expect swirling world events to promote greater volatility, demanding more attention to cool assessments of risks to rewards. Forethought, concentration and a cool head can provide a much more satisfying run despite bumps like a Taos skier shifting from the beginner “Bambi” slope to Al’s Run or Stauffenberg.
Growing dividend stocks make sense in a low interest rate environment. The medical and technological sectors continue to provide excellent candidates. I would avoid auto stocks, which are currently doing well but are also repeating their traditional blunders by adding excess capacity.
The big banks are tempting but I am not convinced that they have made their way out of the housing mazes. In finance, standouts are Visa (V-$258) and BlackRock (BLK-$361), the very large and very successful asset manager.
In the medical sector, I expect solid long-term wins over bonds from Amgen (AMGN-$157), Bristol-Myers (BMY-$61), Johnson & Johnson (JNJ-$102), and Pfizer (PFE-$32). I am adding a new buy, Medical Properties Trust (MPW-$15). This is a REIT focused on net leases of hospitals. Yield is 5.5% with increases for five straight years.
The tech sector offers attractive and potentially increasing yields from Apple (AAPL-$112), Intel (INTC-$36) and Applied Materials (AMAT-$24). Some consumer stocks will get a boost from lower gas prices. A median income ($52,000) household will save about a week’s pay, which should benefit Costco (COST-$140) and Simon Property Group (SPG-$204).
Energy stocks are still uncertain but relatively assured dividends will flow from Chevron (CVX-$108) and Exxon (XOM-$92). Among defense stocks, Northrop Grumman (NOC-$154) yields 1.8% with an eleven-year record of dividend increases. Union Pacific (UNP-$114) is similar. Its oil shipments may drop but so will its operating costs.
Three straight down weeks revived investor anxieties. As always, investors should try for a long-term perspective, remembering, “the fundamental things apply/As time goes by.”
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622
