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FLASH: Later this month when the FOMC cuts rates, and then again in September and December, it will keep them near Zero for a very long time.
An expected interest rate cut by the Fed later this month is pushing yield-oriented US fund managers further afield in search of income at attractive prices.
About 50% of the companies in the S&P 500 have a higher dividend yield than the roughly 2.04% yield that benchmark 10-yr Treasuries offer now, so value-conscious fund managers say they are hesitant to buy shares of companies in dividend-rich utilities or the real estate sector because their valuations are well above historical norms.
Instead, fund managers say, they are picking up yield in sectors from energy to technology.
“You cannot just throw a dart because some of these typical safe-havens are trading at much higher market multiples than they typically do,” said a portfolio manager. “It’s hard for me to buy a utility company when I could buy a company like Home Depot, which increased its dividend by 32% in March and will likely benefit from a pick-up in the housing market,” he said.
Shares of Home Depot Inc (NYSE:HD) yield 2.52% and are up nearly 25% YTD, as of Friday’s market close, compared with a roughly 18% gainer in the benchmark S&P 500 over the same period. The S&P 500 as a whole yields 2.38%.
With negative bond yields in Japan and Europe, the Fed will likely keep US interest rates low for a “very long time,” putting a premium on companies that can grow their dividends and maintain their yields.
Other fund managers are rotating out of the bond market in search of income from stocks, which they say appear to offer more sustainable sources of yield. As the low yields in the fixed-income market are making managers look for and take risk elsewhere in shares companies like AT&T Inc (NYSE:T), which yields 6.13% and has a trailing PE/R of 12.9. Shares of the company, which plans to launch a streaming service next year to compete with Netflix (NASDAQ:NFLX) are up 16% YTD.
This market that has been focused on growth investing for about 10 years running now and managers are confident that the high dividend paying companies are not going to cut them.
Have a terrific weekend.