The latest flare-up in trade tensions has quickened investors’ flight to haven assets, pushing bond yields down to their lowest levels in years. Wall Street analysts say the pullback in yields, along with a new phase of monetary loosening by central banks around the world, should give investors a new rallying cry for the second half of the year: “There is no alternative” to stocks, known as the Tina effect.
Nearly 60% of stocks in the S&P 500 offer a dividend yield of at least 1.7%,
according to FactSet, better than the 1.640% yield where 10-year U.S.
Treasurys settled Monday. AT&T Inc., cereal maker General Mills
Inc. and memory chip company Western Digital Corp.
are among the highest-yielding—and best performing—stocks
in the index this year. Each has dividend yields of at least 3.6%, while yields
across the broad index average about 2%.
The percentage of outperformers is among the highest of the morethan-a-decade-old bull market, says Keith Lerner, chief market
strategist at SunTrust Advisory Services. He added that, on average, about
17% of S&P 500 stocks have carried dividend yields exceeding those of 10-
year Treasurys since 1990.
The allure of steady, income-generating stocks is expected to be a
stabilizing force for major indexes in the months to come.
“This is a hard period for most investors to navigate through,” says Brent
Schutte, chief investment strategist at Northwestern Mutual Wealth Management. “But stocks are supported by low bond yields as long as we
don’t have a recession.”
A mix of trade tensions and fears that growth is slowing around the world
have dented the stock market’s rally. The S&P 500 has stumbled 3.3% so far
this month, knocking its year-to-date gain to 15%. Investors, meanwhile,
have stepped up their flight to haven assets, pushing bond yields down.
During the pullback, analysts at UBS Group AG and Wells Fargo Investment
Institute, among other firms, have been urging investors to buy dividendgenerating stocks, especially those that are less susceptible to trade
Dividends pad stock returns and offer investors a steady stream of income.
Taking dividends into account, an S&P 500 index that measures total return
is down just 2% this month and remains up nearly 18% for the year.
Dividend-paying stocks can help insulate investors from the worst of a
pullback. When the S&P 500 fell 6.6% in May following renewed trade
anxieties, a UBS portfolio including Home Depot Inc., McDonald’s Corp. , JPMorgan Chase & Co. and
other dividend-paying stocks with below-average exposure to China fell a more modest 3.7%.
Investors, however, need to consider more than just a company’s share
payout, according to analysts. Some of the highest-dividend-yielding stocks
are among the market’s worst performers this year. In some cases, yields
are higher because stock prices have fallen. Too high of a yield can be a sign
of distress. The dividend yield of the telecom company CenturyLink Inc.
stands at 9.3%, but shares have slid 26% in the midst of broader
turmoil for telecoms.
S&P 500 energy stocks carry a yield of 3.8%, the highest of the broad index’s
11 major sectors. But worries of a supply glut have hurt shares of energy
stocks this year. The sector has slid 8.9% since the end of June, cutting its
year-to-date gain to 1.3%.
The disconnect between dividend yields and bond yields can be a factor of
tepid economic growth, and it can spill over into the stock market. Take
Japan, for example. The Nikkei 225 has had a higher dividend yield than what is offered by 10-year Japanese government bonds for more than a
decade, but modest economic growth has weighed on returns. The S&P 500
has risen more than 700% over the past 30 years, compared with a 40%
contraction in the Nikkei.
“Markets have to be very confident about the future, as well as the stability
of a dividend going forward,” says John Vail, chief global strategist at Nikko
Investors should seek companies that have solid growth trajectories and
pay healthy dividends, rather than those that offer the biggest payouts, says Mr. Vail. Utilities and consumer-staples companies, for example, pay some
of the highest dividends, but those companies have been fighting pricing
pressures and tend to grow more slowly than those in the technology and
Technology companies in the S&P 500 sport a dividend yield of 1.4% and
have risen 25% this year, as investors concentrate on companies with the
potential to expand sales and profits.
Apple Inc. carries a 1.4% dividend yield, matching the broader
sector’s average, and is up 27% for the year (nearly 29% on a total-return
basis). Several companies that pay richer dividends are doing just as well, if
not better. Semiconductor company Lam Research Corp. has a
2.3% yield and is up 44% this year, while International Business Machines
Corp. ’s 4.6% yield juices the computing giant’s total return to 22%,
compared with 18% on the basis of price change.
At the same time, stock valuations have improved as major indexes pull
back from their July records—an enticing factor for price-conscious
investors who thought shares of many companies were getting expensive.
The S&P 500 is trading at 16.3 times its earnings over the next 12 months,
down from more than 17 times in July, according to FactSet. Analysts at
Goldman Sachs and other firms say the broad index could comfortably reach
a valuation of 18 times by year-end, as long as interest rates fall or remain
“Dividend yields are going to come into play for people looking to nibble at opportunities in the stock market,” says Mr. Lerner. “Even if you’re more bearish, then equities that pay dividends are going to help buffer portfolios during periods of uncertainty.”
- Michael Wursthorn at Michael.Wursthorn@wsj.com
- THE WALL STREET JOURNAL