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