Yields on Treasuries in the US and around the world are at or not far from their lowest levels in what for many investors amounts to more than their entire lifetimes. As yields have dropped, investors looking for yield have been forced to move increasingly further down the capital structure to get it. Now, with corporate bond and high yield debt trading near record low yields on both an absolute basis and relative to Treasuries, investors are increasingly turning to the equity market in their search for yield.
With a yield of just under 2.5% for the 10-year US Treasury, the S&P 500’s 1.91% yield doesn’t look too bad to some investors who like the option of a similar yield and the potential for some capital appreciation as well (albeit with more risk). Outside of the US, the yields of some equity markets look even more attractive relative to yields on their respective 10-year sovereign debt. In Spain, the IBEX 35 has a yield of 4.75% compared to a yield of 2.57% on 10-year Spanish sovereign debt. In more economically stable countries, we see a similar scenario. The FTSE-100 has a yield of 4.66% compared to a yield of just 2.57% on 10-Year British Gilts, and in Germany the DAX has a yield of 2.76%, which is more than twice the yield in 10-year Bunds! No matter where you look, if you are an investor looking for yield, the fixed income market just doesn’t seem to be cutting it, and that has caused some to turn to equities.
As a result of the lack of income in fixed income investments, we have seen an increase in interest from clients regarding dividend paying stocks. For example, in our recent survey of Bespoke clients, there was a lot of feedback from readers looking for more information and coverage of dividend paying stocks. To that end, we have launched our Bespoke Dividend Income Model Portfolio. This portfolio is meant to be a diversified list of mid to large cap equities across the spectrum of market sectors. While the names included are not necessarily the highest payers, they have above average payouts relative to other dividend payers in their sector, and have a history of consistently not only maintaining, but also increasing, their dividends. Also, the percentage of earnings that they pay out in the form of dividends has typically been low or at a reasonable level (less than two-thirds of earnings). Finally, in an attempt to avoid stocks that have high yields because of falling stock prices, we also incorporated a filter to weed out stocks that have been poor performers relative to the overall market.
As is always the case with any stocks we highlight, we do not recommend that investors go out and blindly buy the stocks included in our Dividend Income Model Portfolio. Instead, we suggest that you research each name accordingly to make sure it fits in with your overall investment objectives. Additionally, while dividend paying stocks have seen their popularity grow inversely to the decline in interest rates, we would remind investors that equities are at the bottom of a company’s capital structure. Therefore, if a company does run into liquidity problems, anyone holding the common stock of the company is at the very back of the line behind holders of senior debt, subordinated debt, convertible debt, and preferred equity among others. No one ever said there was a free lunch.
The Bespoke Model Dividend Portfolio is available to all Bespoke subscribers (Newsletter, Premium and Institutional). Please click on the thumbnail image above to see the layout of the Bespoke Dividend Income Portfolio. To view the portfolio, click on the button below to become a Bespoke subscriber today!