Dividends beating bond yields in US by most in 15 years

Published September 8, 2010


Dividends beating bond yields in US by most in 15 years

(NEW YORK) More US stocks are paying dividends that exceed bond yields than any time in at least 15 years as profits rise at the fastest pace in two decades.

Kraft Foods Inc and DuPont Co are among 68 companies in the Standard & Poor's 500 Index with payouts that top the 3.78 per cent average rate in credit markets, based on data since 1995 compiled by Bloomberg and Bank of America Corp.

While Johnson & Johnson sold 10-year debt at a record low interest rate of 2.95 per cent last month, shares of the world's largest health products maker pay 3.66 per cent.

The combination of record-low interest rates, potential profit growth of 36 per cent this year and a slowing economy has forced investors into the relative value reversal. For John Carey of Pioneer Investment Management and Federated Investors Inc's Linda Duessel, whose firms oversee US$566 billion, it means stocks are cheap after companies raised payouts by 6.8 per cent in the second quarter, data compiled by Bloomberg shows.

'That's the tug-of-war that's going on right now,' said Peter Vanderlee, a money manager at ClearBridge Advisors, a unit of Baltimore-based Legg Mason Inc, which oversees US$659 billion. 'If we are going into a double-dip recession, maybe we're not as cheaply priced as one would suggest. The other side of it is that if we're just experiencing a slowdown, but we're avoiding a recession, then prices are clearly attractive.'

The last time the number of S&P 500 companies paying dividends above the corporate bond rate approached the current level was in March 2003, data compiled by Bloomberg shows. That was just after the start of a bull market in which the equity index more than doubled over five years.

Bank of America Merrill Lynch's US Corporate Master Index has returned 9.5 per cent this year, compared with the S&P 500's gain of 0.4 per cent, including dividends. Since 1995, bonds in the index have yielded an average of 6.2 per cent, compared with S&P 500 dividends of 1.8 per cent.

The relationship flipped after the Federal Reserve cut its target rate for overnight loans between banks close to zero and consumer prices fell by the most in six decades, helping send interest on 10-year Treasury notes as low as 2.42 per cent last month. -- Bloomberg

Risk Appetite is Back

Risk appetite is back big time. The JPM Non Investment Grade Index fell to 590. The last time it fell this low was back in Jan 2008. If the risk appetite measure works, the MSCI World Indexd could rise between 15 - 20% very soon! For emerging market indices, the rise could be betwee 30 - 60%!

Let's wait and see what happens. I'm piling on my risk trades and some of you have followed suit. Good on you. In summary:

Equities: time to pile on to emerging market and Asia ex Japan stocks. Increase your asset allocation to 75% from 60%.

Bonds: lighten up on emerging market and Asian bonds to 10%. Stick to preferred shares, convertible bonds, never ever into investment grade, long-dated bonds.

Alternatives: Load up on gold because inflation is going to rise in 2011 and the west is going to print money. Load up on oil on consumption recovery next year. Buy industrial metals because of infrastructure investments in BRIC. Buy agricultural commodities due to changing weather and population growth.

Volatility funds is a hold. We will slowly add more as the stock market rises.