Home' Trinidad and Tobago Guardian : March 8th 2015 Contents SBG10 STOCKS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MARCH 8 • 2015
Dividend investing used to be so easy, not
to mention lucrative. But it may be set
to get a lot different.
Stocks that pay the biggest dividends took a nosedive last
month. Power and gas utilities---once such steady and boring
payers of dividends that they were called "widow-and-orphan
stocks"---posted their second-biggest drop since the financial
crisis. That s even though every other sector of the market
continued to cruise higher in February.
Get ready for yet more swings, say managers of many div-
idend-focused mutual funds. Last month may have been a
sneak preview of the volatility in store as interest rates eventually
climb, and managers of dividend-focused funds have changed
their playbook in anticipation.
To be sure, those same managers also still tout that div-
idend-paying companies tend to have more stable businesses
and are profitable enough to promise regular checks to share-
holders. Companies in the Standard & Poor s 500 index paid
a record US$45 billion in dividends last month, according to
S&P Dow Jones Indices, and full-year payments look set for
a fifth straight gain of at least 10 per cent.
Even so, many fund managers are shying away from utilities
and other very high-yielding dividend investments, the ones
that worked best in prior years. Instead they re focusing on
areas of the market that received less attention---and fewer
investment dollars---but may better withstand rising rates.
The big price changes for dividend-paying stocks, up and
down, are due to a simple cause: movements in interest rates.
For years, bond yields have persisted at low levels, frustrating
anyone looking for income. A 10-year Treasury note had a
yield of 2.18 per cent at the start of the year, roughly half of
what it was a decade ago, for example.
That pushed many income investors who typically would
rely on bonds to pour into dividend-paying stocks with the
Cue utility stocks, which have a dividend yield of 3.7 per
cent, well above the two per cent yield of the S&P 500. When
bond yields were falling, like last year, income-hungry investors
piled into utility stocks and sent their prices surging. Utilities
had a total return of 29 percent, easily topping other sectors
and more than doubled the S&P 500 s return.
But in February, the parade into utility stocks turned into
a scramble for the exits. The yield on the 10-year Treasury
rose to nearly two per cent from 1.64 per cent at the start of
the month, and bonds suddenly looked more enticing. The
rise in rates led to a drop in demand for utility stocks, sending
them to a monthly loss of seven per cent.
Mariana Connolly, client portfolio manager for the JPMorgan
Equity Income fund, calls investors who move from the bond
market to stocks and back again "renters," as opposed to
owners of dividend stocks.
She expects more renters to leave in the coming months as
the Federal Reserve begins raising short-term interest rates
for the first time since 2006. Their departure is likely to hurt
the segments of the market with the highest dividend yields,
That s a big reason why Connolly has been moving over
the past 18 months from utilities, telecoms and real-estate
investment trusts to areas of the market with lower yields,
where renters are less prevalent.
She put money in financial stocks, for example. Not only
do regional banks have fewer renters, rising rates could also
enable them to charge higher interest rates on loans and
increase their profits and ultimately their dividends.
And when the renters are all gone? "Once they go back to
their day job as bond investors," Connolly says real-estate
investment trusts and other high-yielding stocks will be
available at more affordable prices.
Of course, predicting higher interest rates has been a noto-
riously common call along Wall Street for years. It s also been
an incorrect one. Rates have remained stubbornly low.
Some contrarians expect interest rates to stay that way given
how weak inflation is, particularly with the plunge in the price
of crude oil. That could mean less pressure on the highest-
David James, portfolio manager at the US$4 billion James
Balanced: Golden Rainbow fund, says the yield on the 10-
year Treasury is more likely to fall in the next six months than
rise, for example. He was buying some utility stocks last
WILL THEY RISE?
Rate worries weigh on dividend stocks
Predicting higher interest
rates has been a notoriously
common call along Wall Street
for years. It's also been an
incorrect one. Rates have
remained stubbornly low.
Links Archive March 7th 2015 March 9th 2015 Navigation Previous Page Next Page