| NEW YORK
NEW YORK Feb 8 The hunt for yield is moving
into the U.S. equity market.
Companies that are likely to grow their dividends have been
increasingly favored by yield-starved investors for their
competitive income-producing shares.
The popularity of equity income stocks, characterized by
Barclays as "the next corporate bond," comes against the
backdrop of falling yields and investment returns on junk bonds,
investment-grade corporate debt and mortgage-backed securities.
Rising interest rates are also a concern to fixed-income
investors as they put pressure on bond prices.
Bond-like equities present a good alternative for many money
"This feels to me like a shift going on that's different
from anything we've seen since the financial crisis," said Don
Taylor, who runs the Franklin Rising Dividends Fund
for investment firm Franklin Templeton.
The vanishing yield in the credit markets has forced
investors into other asset classes.
The average investment-grade corporate bond yield, based on
the JP Morgan US Liquid Index (JULI), was 3.62 percent at the
end of January, just modestly lower than 4.31 percent at the end
of 2011. That is a less than two percentage point advantage over
the safe-haven 10-year Treasury yield, which has hovered around
two percent in recent weeks.
Even managers who specialize in bonds are leaning toward
stocks with growing dividends.
The Eaton Vance Bond Fund, which was launched on
January 31, is geared toward investment-grade corporate bonds,
but can invest 20 percent of its assets in stocks. Kathleen
Gaffney, the fund's lead manager, told Reuters that she will
seek stocks with dividend growth.
Dividend-paying stocks aren't bullet-proof.
The strong inflows into stock funds so far this year could
prove short-lived if investors revert to a bearish sentiment.
Dividends also can, and often are, cut or suspended by
Even if dividends are stable or rising, that doesn't mean
the underlying stock is. Last year, 114 dividend-paying stocks
fell more than the value of their dividend, according to Howard
Silverblatt, senior index analyst at Standard & Poor's.
Dividend-paying stocks also have not had the same kind of
love as corporate bonds and junk debt.
In 2012, dividend-paying stocks were under selling pressure
because of fears of higher taxes. If U.S. lawmakers had failed
to reach a deal to avert Bush-era tax cuts, the upper income
bracket could have faced a steep increase on dividend taxes from
15 percent to 39.6 percent.
After including an additional 3.8 percent Medicare surtax on
investment income, that tax rate could have become 43.4 percent.
Instead, taxes on dividends increased to 23.8 percent, after
including the new Medicare surtax that went into effect. The
moderate increase was a relief to investors.
In the seven weeks leading up to the "fiscal cliff" deadline
on Jan. 1, however, investors fled dividend stocks. Funds that
specialize in dividend stocks suffered net outflows of $864
million between November 14 and January 2.
The pressure also may have weighed on overall inflows into
the funds last year, according to Tom Roseen, head of research
services at Lipper. U.S.-based mutual funds and ETFs that hold
dividend stocks reaped inflows of $20.8 billion throughout 2012,
which was lower than gains of $30.9 billion in 2011.
Robert McConnaughey, head of equity at Columbia Management,
which manages $340 billion in assets, said the firm has shifted
substantially out of investment-grade corporate bonds and into
stocks with rising dividends. "The place that we find the most
compelling are attractive yields," he added.
Barclays recommended 19 stocks from the electric utility,
MLP/natural gas infrastructure, and REIT industries. They
include Access Midstream Partners, Alexandria Real
Estate Equities, and Northeast Utilities.
"These stocks have an average dividend/distribution yield of
3.8 percent, with an average annualized total return potential
of 14.8 percent over the next year and an average 0.69 beta,
making them attractive versus bond alternatives," the report
"What gets people back into equities is fear of rising
interest rates," said Jonathan Golub, chief US equity strategist
at UBS, in New York. Golub said that investors will likely
consider dividend stocks as an alternative to corporate bonds,
which lose their yield advantage as Treasury yields move upward.
Investors have poured $40.3 billion into U.S.-based stock
mutual funds and exchange-traded funds so far this year, the
best five-week stretch in 13 years, according to Lipper. That
sum more than doubles the $18.8 billion that bond funds have
Funds that specialize in dividend stocks captured just $1.9
billion of those inflows, a sign that they have yet to reap
their full gains, said Roseen of Lipper.
"It does seem to us like there is an awful lot of room to
run in terms of a reallocation back to equities," said
McConnaughey at Columbia.
The inflows into stock funds come on the heels of a few
high-profile investment firms' targeted focus on stock
management, including DoubleLine Capital LP, Loomis Sayles &
Co., and PIMCO.
Jeffrey Gundlach, DoubleLine's chief executive and chief
investment officer, told Reuters in January that "inflows into
bonds are very likely to decline" this year as bond funds see
Investors also remain concerned about a sharp selloff in
bonds as stocks become more attractive and interest rates rise.
Taylor of Franklin Templeton said that the shift into stocks
could continue on strong economic signs such as a housing
upswing in the U.S. and improvements surrounding the European
debt crisis. He added that rising dividends offer income despite
gradual inflation, which eats away at bond returns.
Dividend stocks, meanwhile, could oust bonds as a favorite
asset if the inflation scenario plays out. The Federal Reserve's
purchases of $85 billion in Treasury and agency mortgage
securities heightens that risk.
"There might be money coming out of the bonds this year as
soon as people start seeing that what they viewed as safe could
actually hurt them," summed up Michael McGowan, portfolio
manager at Forward Funds.