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Investors Dash Back to Dividends

11 April 2014 in Trading Ideas

Despite the recent pullback by the broader market, we’ve definitely seen a turn of events for many stocks that were outperforming by leaps and bounds not that long ago.

Take, for example, shares of electric-car maker and momentum-stock darling Tesla. It is still up more than 400% in the past 12 months, but in the past month the stock has looked downright mortal, if not something less than that – the stock is down nearly 12% in the past month, while the S&P 500 has been flat.

Tesla’s fate has been echoed recently by many other technology and biotechnology stocks that had helped propel the broader market’s run for more than a year.

 

As the New York Times suggested earlier this week, behind the plunge of the Nasdaq, in particular, was its very nature as the home of many of the highest highfliers, whose valuations had soared to spectacular levels. Over all, the Nasdaq earlier this week was trading at 31 times the reported earnings of its constituent companies — nearly twice the ratio seen by the S&P 500.1

“There is concern that we could be at a near-term market peak,” Dane Leone, the head of United States market strategy for Macquarie, told the Times. If that is true, he added, investors rightly worried about holding onto stocks that were correlated so closely with overall market performance.

That worry and concern has many investors favoring defensive strategies – one in particular being steady, but less exciting dividend-paying equities.

As the Wall Street Journal reported, the move to dividends can be seen in the performance of the $13 billion iShares Select Dividend exchange-traded fund, a basket of regular dividend payers. The ETF has climbed by 2.6% so far this year. Last year it rose 25%, trailing the broader market.2

Certain dividend-focused motifs have also recently performed well. The High-Yield Dividends motif is up 3.5% in the past month, while the Dividend Stars motif has risen 2.5%.

Over the past 12 months, High-Yield Dividends has gained 24.9% and Dividend Stars is up 12.5%. Over that same period, the S&P 500 has increased 20.4%.

 

The Journal explained that the unexpected drop in interest rates this year has increased the appeal of dividend-paying stocks. Despite the Federal Reserve’s staggered withdrawal of its rate-lowering stimulus measures, the yield on 10-year Treasury notes stands at 2.73%, down from 3% at the start of this year. That appeals to investors seeking income, as does the prospect of gains from rising stock prices.

Investors widely expect interest rates to creep higher, the Journal said, a development that could over time reduce the relative appeal of dividend payers. But some say dividend payers may continue to shine unless rates spike, an outcome that is seen as unlikely amid Fed efforts to hold down short-term rates, according to the report.

The appetite for dividends comes as US companies have been generally boosting payouts to shareholders. Annual dividend payouts by S&P 500 companies amounted to a combined $34.80 per share last year, the Journal reported, and are expected to grow 9.9% to a record $38.98 a share in 2014, according to data provider FactSet.

The Journal noted that companies in the S&P 500 index held a record $1.1 trillion in cash as of April 1, according to Thomson Reuters. And capital expenditures dropped 4% in the fourth quarter year over year, according to FactSet, a sign that companies may remain reluctant to invest.

With reluctance in the air for both companies and investors, the perceived reliability of dividend payouts has been, for some, and attractive alternative in trying to mitigate market turbulence.

1Michael J. de la Merced, “Gravity Hits Highflying Tech Stocks,” nytimes.com, April 6, 2014, http://dealbook.nytimes.com/2014/04/06/gravity-hits-highflying-tech-stocks/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1.

2Dan Strumpf, “More Investors Are Drawn to Dividends,” WSJ.com, April 6, 2014.

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