Tagged High Income

Earnings Keep Pushing Stocks Higher

The flurry of second quarter earnings reports is officially underway — aluminum producer Alcoa reported earlier this week that it was back in the black and that things were looking up.  Another positive report came from transport titan CSX, which said that its business was chugging along nicely with 2nd quarter coal shipments up 7%. After Tuesday’s market close, Intel reported quarterly earnings of 51 cents per share, ahead of analysts’ expectat … Read More

via The Curious Capitalist

Market Correction Provides Attractive Dividend Yields

The recent stock market correction has made stock yields much more attractive. Dividend yields have returned to higher levels and the Dow now yields more than 10 year treasury bonds.

. . .one good estimate puts the dividend yield on the Dow at 3.1%, while Eddy Elfenbein has calculated it to be 2.9%. Either way, it’s higher than the current yield on the benchmark U.S. Treasury bond, which was last seen at 2.89% and falling.

via The Dow yields more than 10-year Treasuries | Reuters |

When investing risk and reward are closely related. Therefore, this Dow vs treasuries comparison gives us some insight into the potential future returns of the two asset classes.

Future Bond Returns

High-quality bond returns are primarily a function of their yield and with treasury yields near all time lows, bonds are likely to produce low returns going forward. In addition, since interest rates cannot go any lower we face the risk that bond prices will decline with a rise in interest rates. For these low-risk investments, the future returns don’t look good.

Future Stock (Equity) Returns

Contrastingly, stocks are producing relatively high yields when compared to treasuries. When you factor in the tax benefit of dividends over taxable bond yields, the case for stocks outperforming bonds in the future becomes even stronger. Furthermore, historical precedent for holding high-yielding stocks is quite strong:

The annualized rate of growth since 1871 is 1.94%. If that seems incredibly low, remember that the chart shows “real” price growth, excluding inflation and dividends. If we factor in the dividend yield, we get an annualized return of 6.61%.

If we added in the value lost from inflation, the “nominal” annualized return comes to 8.83% — the number commonly reported in the popular press. But for an accurate view of the purchasing power of our returns, we’ll stick to “real” numbers.

via Secular Bull and Bear Markets – dShort.com

Wharton Professor Jeremy Siegel and Yale Professor Robert Shiller have both done considerable work on the historical returns of the equity markets and the impact of dividends on those returns. Their work is the basis for my belief that investors should consider paying less attention to the daily price fluctuations and more attention to the yield of their portfolio. Unfortunately for investors, it is uncomfortable (or risky) to hold stocks and they are tired of watching their life savings go up and down. Owning high-dividend stocks and focusing on the yields can help investors overcome the psychological challenge of being an owner of a highly volatile asset like stocks.

Why Own Stocks Today?

1) Dividend yields are attractive.

2) Dividend yields are likely to increase as the economy recovers over the next five years.

Investors need to remind themselves that historically a large percentage of stock returns comes from the dividends they pay, not price appreciation. To help get through these markets, you may want to consider paying more attention to the yield on your stock portfolio and less to the daily value. Here is a list of high dividend index funds:

High Dividend Index Funds (ETFs/ETNs)

Strategy Ticker Yield Exp. Ratio Asset Class
PowerShares Listed Private Equity ETF PSP 5.58% 0.60% Global Small Cap Value
Vanguard REIT Index ETF VNQ 4.08% 0.13% US Real Estate
SPDR Dow Jones Intl Real Estate ETF RWX 3.66% 0.59% Non US Real Estate
JPMorgan Alerian MLP ETN AMJ 5.83% 0.85% US Mid Cap Value
WisdomTree Total Dividend ETF DTD 3.49% 0.28% US Multi Cap Value
Vanguard High Dividend Yield Index ETF VYM 3.12% 0.20% US Large Cap Value
WisdomTree DEFA Fund ETF DWM 8.45% 0.48% Non-US Multi Cap Value
iShares MSCI EAFE Value Index ETF EFV 4.46% 0.40% Non-US Multi Cap Value
WisdomTree Emerging Mkts Income ETF DEM 6.56% 0.63% EM Multi Cap Value

Data source: WSJ.com, Wall Street Journal data as of July 4th 2010. The advisor holds the following positions: PSP, VNQ, RWX, AMJ, DTD, DWM, DEM.