Looking beyond the dividend yield

Price performance and valuations in the US stock market have become more varied. Correlations have broken down. It is notable that defensive stocks, such as stocks in the consumer staples, health care, telecom and electric utilities sectors have moved ahead this year. Some key companies in these industries and sectors have outperformed the general market, and their valuations now seem high compared with other sectors of the market.

Three of the sectors that have outperformed are particularly known for high dividend payouts. So, while there are no imminent threats to this dividend strategy, such as might be presented by a looming increase in bond yields, given the valuations it may be time to takea look at some other strategies. Let’s look, for example, at the technology sector.

Here is a sector that is changing consumer lives and turning upside down basic business practices. Here is a sector that stands to benefit from a lot of deferred soft and hardware maintenance. The sector has virtually no debt, generates high margins and enjoys relatively fast earnings growth. It has a notably lower sensitivity to market fluctuations, or beta, than ever before. And from a valuation perspective, it trades at a much lower forward price-to-earnings ratio than stocks in the defensive sectors.

As I said, there are no imminent threats to a stock strategy centered on dividend yields. We are now and have been fans of dividends, especially dividends being paid by companies with the growing cash flow stream to back up those dividends. Dividend strategies have merit. When paid and reinvested in the market, dividends make up about 40% of long-term returns and are 70% less volatile than the underlying earnings themselves.

In a yield-starved world, it makes a lot of sense for investors to seek out safe stocks, and especially safe stocks that pay dividends. But as valuations for those safe stocks rise, it may be time for investors to look more broadly.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.


1 comment:

Dividend Yield said...

Dividend yield is a very important factor which you should consider while making a long term investment. This yield can be used to compare a stock to other forms of investments that generate income to the investors.

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