| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
|
0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| More |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Stocks have good year, but what about yield? |
December 23, 2006
By J. ALEX TARQUINIO The New York Times
As euphoric investors watched their stocks surge this fall, they probably didn't give a second thought to dividends. But the rally has left investors who look for income in a bit of a quandary.
Many securities that are typically good dividend payers utilities, for example, or real estate investment trusts soared the highest this fall. Now their yields have been compressed, in some cases to meager levels. And if that convinces some investors to pay more attention to bonds, they'll have to navigate a murky outlook for the debt markets.
If you're an income investor, many Wall Street strategists offer this first piece of advice: hoard cash. They say it's hard to beat the 5 percent that many money market accounts and certificates of deposit are now paying.
Richard Bernstein, the chief investment strategist at Merrill Lynch, is recommending a portfolio allocation of 50 percent stocks, 30 percent bonds and 20 percent cash. And Stuart A. Schweitzer, the global markets strategist at JPMorgan Asset Management, said investors should put more of their portfolios into cash than they might normally feel comfortable with.
"With yields upwards of 5 percent, even if the Fed eases a bit in 2007, as it might, cash will still earn a far sight better than it did two to three years ago," Schweitzer said.
Of course, that doesn't mean investors should ignore a stock that pays a good yield. If investment income is important to you and you plan to hold some equities in your portfolio strategists recommend looking for large-cap stocks that still pay decent dividends and have a good track record of raising them over time.
"We are pretty bullish on companies whose stocks can provide a nice income return, but also some earnings growth," said Henry H. McVey, the chief investment strategist at Morgan Stanley.
For now, McVey said, a good dividend yield is at least 3 percent, which is well above the average yield of 1.8 percent for the Standard & Poor's 500-stock index
Of course, that's still much less than the interest now paid on many bonds or bank deposits. McVey said many American companies could afford to pay more dividends and might do so in the future. The companies in the S&P 500 now pay 29 percent of their profits to shareholders in the form of dividends, on average a figure that McVey said was historically low. Since 1984, the average dividend payout ratio for the index has been 39 percent.
But he said as more baby boomers retired, many would demand higher dividends. Among the stocks that are typically popular with dividend-hungry investors, many have yields that are low by past standards. In particular, the shares of many unregulated utility companies and real estate investment trusts, or REITs, have risen so sharply this year that their yields have plummeted to little more than 2 percent.
To be sure, REITs have trounced the rest of the stock market this year. Mutual funds that invest in real estate which primarily own REITs have been the best domestic fund category, with average gains of 31.5 percent through Thursday, according to Morningstar. By law, REITs must pay most of their income to investors as dividends, but the steep climb in their share prices has driven down their yields. Schweitzer cautioned REIT investors not to expect the huge capital gains of recent years to continue. But he said he wasn't bearish on their share prices either, because he didn't think the commercial real estate that most REITs own like office buildings and hotels had become as expensive as residential real estate has.
Although utilities funds have also had great returns this year an average of 25.5 percent through Thursday a few large, well-known utility stocks still have high yields. Verizon, the telecommunications company based in New York, has a yield of 4.4 percent, while Con Edison an old-school, regulated power company also in New York yields 4.8 percent. Sam Stovall, the chief investment strategist at S&P, says he likes financial stocks now, partly because many still have good yields. "A lot of companies within the financial sector have S&P quality rankings of A-minus or higher," he said, "and above-average consistency in raising earnings and dividends."
Although their yields are typically not as high as those of the best yielding utilities or telecommunications stocks, shares of JPMorgan Chase are yielding 2.8 percent now, while those of Citigroup are yielding 3.6 percent.
Bernstein of Merrill has two more bits of advice for American investors who want to bolster the yield of their portfolios: shop for dividends abroad, and bulk up on high-grade bonds at home.
Although the dollar has fallen 9.8 percent against the euro this year, Bernstein said the dollar could slide further in 2007. If it does, he said, Americans can benefit from owning foreign stocks that pay good dividends. "People always talk about diversification by geography, but they're thinking of capital gains. They never think about diversification in terms of income," he said. "But if you're bearish on the dollar, why wouldn't you want your dividends in Swiss francs?"
By and large, Bernstein said, Americans can hunt for good dividend-paying European stocks in the same corners of the market where they would look at home utilities, telecommunications and consumer staples. He said investors who preferred mutual funds could look for a global equity and income fund that owns a hefty stake of European dividend-paying stocks, or a European-focused fund with a good yield.
If you want to bolster interest income on the fixed-income side of your portfolio, Bernstein strongly advises against riskier issues. The value of high-yield bonds and emerging-market debt has risen so much in recent years, he said, that investors simply aren't being compensated for the extra risk.
Bernstein now favors corporate bonds rated triple-A. While global financial markets now have few scarcities, he said, the market share of triple-A bonds in the global bond markets has shrunk to half its level of less than a decade ago. Triple-A bonds now make up a little more than 8 percent of the global bond markets, down from 15 percent in 1998.
"There's been such a flood of other issuance from emerging markets and high-yield," Bernstein said. He predicted that this could create a shortage of the highest-rated corporate debt, especially if the spread between high-grade and high-yield bonds which has become razor-thin in recent years were to widen.
Finally, Bernstein cautioned investors not to wait until they were facing retirement to focus on investment income and to remember the lifelong benefits of compounding dividends and interest.
He pointed to the technology-heavy Nasdaq composite, and its performance against utilities stocks, which traditionally pay big dividends. The Nasdaq returned 11.1 percent a year, on average, from its creation in February 1971 through November this year. The S&P utilities index, meanwhile, had average annual returns of 11.4 percent.
"Classic mom-and-pop utilities beat tech stocks, because of the power of compounding dividends," Bernstein said. "The tortoise beat the hare."
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| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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