Eq: Dividends
(New York)
It is a rough time to find income. The big move downward in yields has crimped payouts to a significant extent. So where can investors find good yield without taking excess risk? Treasury yields are paltry, most stocks aren’t offering much, and high yield bonds look vulnerable in the context of a possible recession. So where can investors look? The answer might be RMBS, or residential mortgage backed securities, especially those unbacked by federal agencies. These are offered by a number of high profile funds, such as the Pimco Mortgage Opportunities and Bond Fund (PMZIX), or the Metropolitan West Unconstrained Bond fund (MWCIX). Yields are typically between 3% to 5%, and critically, the underlying return is linked to the health of the US consumer, a group that has been doing very well despite broader macroeconomic headwinds.
FINSUM: We like this call given the housing market is not broadly feeling bubbly and consumers seem to be in quite good shape.
(New York)
Advisors and their clients love dividend stocks. They have some of the stability and income of bonds, but also all of the capital appreciation characteristics of equities. However, advisors may want to stop buying them, argues Barron’s. The reason why is that most of the big fall in bond yields is likely priced in, which means likely all of the gains for dividend stocks have already been made and there is likely little appreciation left. Accordingly, the path of least resistance is probably down.
FINSUM: The big fall in bond yields was bullish for dividend stocks as they get comparatively more attractive as yields fall. However, if the fall in yields stalls, it is hard to imagine dividend stocks could go anywhere but downward.
(New York)
Vanguard made some headlines earlier this month when it re-opened one of its long closed-to-new-investors dividend funds (VDIGX). However, it was not the only fund to reopen, as a whole suite of Vanguard dividend funds are once again available. The funds come in two flavors, active or passive. VDIGX is actively managed and has the best one-year return, but it is almost the most expensive. Check out the firm’s VIG fund (Dividend Appreciation), which has a 11% one-year return and charges only 6 basis points.
FINSUM: This whole suite of funds has a good track record and some have characteristically low fees.
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(New York)
Name the two main factors which drove this decade-long bull market. Ours would be the Fed’s easy policy, and huge levels of corporate buybacks. Well, that second one, which has inarguably been at least a core pillar of the bull run, is ending. Companies are pulling away from share buybacks, lessening one of the big price drivers for the market. Buybacks have slipped alongside the market’s trouble, as companies are no longer stepping in to buy shares, sending buybacks to their lowest level in 18 months.
FINSUM: Do you remember the earnings recession that occurred for a few years during this bull market? Buybacks are what kept prices afloat.
(New York)
There are a handful of safe haven stock sectors that investors tend to rely on during market downturns. Healthcare, utilities, and REITs come to mind. Lately, some have been saying bank shares may also prove a good defense. However, investors should be very wary of two of those just mentioned: healthcare and banks. While on the surface healthcare stocks look very good for a recession—it is not as if people stop getting sick—the reality is that there has never been more regulatory pressure on the sector (from both sides of the aisle), which means it is far from safe. Additionally, the idea that banks have become safe, utility-like dividend machines is flawed, as bank earnings are very exposed to the economic cycle, and thus will likely see big moves in both price and yield.
FINSUM: We agree with this assessment entirely. Healthcare is more vulnerable than it has been in memory and banks are a long way from being dependable utilities (excellent PR job by Wall Street though!).
(New York)
Rates are looking likely to head sharply lower, and the inversion does not seem likely to abate. Since the Fed’s 25 bp cut a few weeks ago, markets and the economy’s outlook have moved sharply lower. This will likely lead to several cuts over the next year. According, what is the best way to play this big change? Two asset classes that fit the bill are gold and dividend stocks/funds. Gold thrives when there are worries about the economy and when rates are falling, so this is a perfect environment for the metal. Throw in the fact that it has been in a bear market for years and you also have valuation on your side. Dividend stocks look likely to do well because they tend to rise as rates fall. Additionally, the sharp drop in long-term yields means a 2% yielding stock looks incredibly more attractive than it did a year ago.
FINSUM: Gold seems to have a lot of momentum and valuation is on its side, but dividend funds seem like a really good bet to us.