Bill Gross: Dividend Stocks and Bonds Make Most Sense Now 30 comments
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In PIMCO Managing Director Bill Gross's monthly market commentary for July 2009, the Bond King comments on structural changes in the US economy that investors would do well to respond to in their portfolios: PIMCO’s driving thesis... is succinctly described as a “new normal” where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the “gorging” of goods and services that we grew used to in decades past... If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher... What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100. Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets – stocks, high yield bonds, and commercial and residential real estate will involve just that – risk. Investors should stress secure income offered by bonds and stable dividend-paying equities. Consumer Cuisinart consumption is a relic of the past.
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This article has 30 comments:
That's true in this economy. But, I also believe it's true in more bullish times as well. In fact, I'm not aware of any market where investors (I'm talking investors, not speculators or traders) shouldn't stress bonds and dividend-paying equities.
1) Inflation to some degree is inevitable meaning interest rates will be raised soon enough. However, if asset values decline continues due to downward pressure on wages from rising labor costs in the developing world and an equalizing of wages in the rich world to be on par with the emerging economies, bonds are a slam dunk. The asset value deflation is, of course, going to be most prominent in the real estate market.
2) Dividend yields are at an all time high. Take BP plc (BP) which is paying %7.09 at the time of this writing, a PE of 9.03 which is still relatively low for energy companies, and plenty of cash. Yields this high can only last so long, so buy these companies while you can.
Because of the uncertainty in the future of interest rates and asset values, and the high yields on very stable companies, this is an unprecedented time of low risk/high return on dividend paying stocks which can not possibly last to much longer.
I am a huge fan of dividends. My concern is the latest reports of predictions of significant pending dividend cuts in both the US and Europe.
Still, dividend stocks get a THUMBS UP!
Does Bill Gross have a track record of predicting the bubble and making good recommendations when it mattered, around Aug-Oct 2007?
Your right that they have less money to grow, but that's not always a bad thing. Not all growth is good quality. Think Starbucks building stores across the street from itself, or banks expanding into the subprime loan market. I want the management to really have to think, "how do I grow this company so I can exercise these stock options".
Treasuries are the final bubble. Ever since the recent Treasury market dustoff, with yields on the ten-year rapidly rising and foreign buyers getting nervous, we've seen a rising drumbeat of articles, pundits and discussions about deflation. Deflation-thesis is the only antidote the Fed and its lackeys have for the obvious inflationary implications of the Treasury's borrowing needs going forward.
Nearly all "news", pronouncements by co-opted insider pundits, MSM blather, currency discussions, tax hike talk etc must be understood within the context of its effect on saving the Treasury market.
When the Treasury market blows up, you'll know.
However, stock selection, valuation, the possibility for exponential market cap expansion, and technical analysis, should still be considered when searching for stocks to purchase.
I have seen way to many stocks, some with above average yields, that essentially returned nothing to investors (even after dividends) for decades.
Check out "The future for investors" by Jeremy Siegel. That has lots of analysis of the type that you say you have never seen. The book makes the case that the real driver of returns is the re-investment of dividends. I think that it is a sound conclusion but there are 2 important questions for the individual investor:
1. What is your tax position with regard to dividends v. retained earnings?
2. Behaviourly, would you re-invest your dividends immediately at the bottom, or would you wait until the stock has risen ... a long way?
On Jul 02 01:54 PM Swashbuckler wrote:
> I'm not sure I have ever seen a convincing case made that dividend
> paying stocks perform better long term than non-dividend paying stocks.
> Sometimes I think investors overlook the fact that when a company
> pays a dividend there is less money for it to use for other very
> necessary priorities--like capital spending, acquisitions, growth,
> debt reduction etc. Not saying here that paying a dividend is inherently
> bad. Am saying it probably depends on the individual company, the
> industry they're in, their cash position and their overall operating
> strategy. Only my opinion.
On the one hand, you have H1N1 all over the place. On the other hand, you have JNJ expanding it market share in the rest of the developing world. Hey, people, can Obama's health package drive PFE and MRK into another GM? Even the bankrupting AIG is worth more than a few bucks. Can PFE be as bad as the used-to-be-insurer speculator?
Is the market crazy or am I stupid?
I have put a quarter of my eggs into the healthcare basket, PFE, MRK and JNJ. Yeah, I am betting on high earnings and high yields.
"Investors should stress secure income offered by bonds and stable dividend-paying equities."
No, I have no bonds. Never put money into 10- or 30-year bonds. They are subject to heavy capital loss when the interest rate finally rises. Does anyone here believe there is another 10 years of lower-than-three-percent average interest rate? I don't!
RMetzler replied: "1) Inflation to some degree is inevitable meaning interest rates will be raised soon enough. However, if asset values decline continues due to downward pressure on wages from rising labor costs in the developing world and an equalizing of wages in the rich world to be on par with the emerging economies, bonds are a slam dunk. The asset value deflation is, of course, going to be most prominent in the real estate market."
Both of these statements are right on the $$$...Also pay close attention to the real estate market...Residential real estate in the $500K and up category is now taking a beating. The commercial real estate sector bubble is declining with much more to come...
On Jul 03 06:23 AM chap08 wrote:
> Swashbuckler
>
> Check out "The future for investors" by Jeremy Siegel. That has lots
> of analysis of the type that you say you have never seen. The book
> makes the case that the real driver of returns is the re-investment
> of dividends. I think that it is a sound conclusion but there are
> 2 important questions for the individual investor:
>
> 1. What is your tax position with regard to dividends v. retained
> earnings?
> 2. Behaviourly, would you re-invest your dividends immediately at
> the bottom, or would you wait until the stock has risen ... a long
> way?
Bill Gross is the Obama Administrations "Minister of Financial Propaganda" in the tradition of Josef Goebbels.
He is pimping for the U.S. Treasury auctions of $1.8 trillion.
When the economy turns there is 2 years of pent up demmand , inventories that have been worked off, labor that has been let go, and capacity utilization that is all geared up for Armegeddon which will cause price increases and ultimately price gouging once the American consumer is given the signal that "the coast is clear."
On Jul 02 02:41 PM SW Richmond wrote:
> Bill Gross checks in to reinvigorate deflation-thesis, help stick-save
> the Treasury market one last time, and generally talk his book. Spare
> me.
>
> Treasuries are the final bubble. Ever since the recent Treasury market
> dustoff, with yields on the ten-year rapidly rising and foreign buyers
> getting nervous, we've seen a rising drumbeat of articles, pundits
> and discussions about deflation. Deflation-thesis is the only antidote
> the Fed and its lackeys have for the obvious inflationary implications
> of the Treasury's borrowing needs going forward.
>
> Nearly all "news", pronouncements by co-opted insider pundits, MSM
> blather, currency discussions, tax hike talk etc must be understood
> within the context of its effect on saving the Treasury market.<br/>
>
> When the Treasury market blows up, you'll know.
SBW, AWF, PIM, PPT, AGD, ANH , CMO, GDF, DGF, MPW, NCZ, NCV
I like Treasuries... I liked them when the 10 year was yielding about 370 basis points again. And no, Treasuries are not a bubble now. The bubble already popped.
I suppose banks would buy long dated Treasuries to profit from the "fat spread" since there is no one else worth lending too. Sorta like the Richard Koo balance sheet recession in Japan.
1. inflation/hyper-inflation is inevitable and is just around the corner.
2. Buy dividend-paying stocks now because the yields are high.
I would like to point out the following bits of data:
. If inflation is either high or coming at you like the inevitable freight train, why has gold not responded? Is there anything that has been shouted from the roof-tops any more than "gold is going to $1500 or $5000" by the pitchmen on TV and radio? Not only do they urge you to buy gold, they want you to buy gold coins or bars. Try spending them at the local grocery or turning them into cash at anywhere near what you paid these hucksters.
. The dividend yield on the Dow 3.36%. This is not even as high as the approximately 4% yield at major tops in the years prior to 1980.
If dividends were to stay the same, a 50% drop in stock prices would bring the Dow's yield back to the aea where it was at the bottoms of 1942, 1949, 1974 and 1982. But, of course, dividends will not stay the same. Companies are cutting dividends and will cut some more. So the falling stock market wil chase an attractive dividend yield. This will not end until prices get ahead of dividend cuts and the Dow's yield goes above that of 1932, which was 17%, or until dividends fall so close to zero that the yield is meaningless.
. The P/E ratio of the S&P 500 was approximately 115 to 1 at the end of the March quarter. What's going to bring it back into line? At major bottoms in the 20's, 40's, 70's and early 80's, the the P/E was as low as the 6-8 range.
. The mutual fund cash/ assets ratio has climbed a bit from its historical low in 2007 (the market's alltime high). At major buying opportunties over the pst 30 years, this ratio has been double where it is today. All these managers are hoping for higher prices ahead, but it is not likely to happen until this presumption is destroyed and they become worried enough to raise cash in the aggregate. When the cash/assets ratio hits 15%, that would represent a bullish buying signal.
If you believe inflation is more likely over the next 3-5 years then most bonds will lose some of their real economic value over the term.
If you believe deflation is persistant then it's a no-brainer, buy bonds.
I suggest the US government and Fed want moderate inflation to erode the burden of debt, and therefore we will stay in an environment of loose money and low interest rates for some time yet as their persist in their efforts to stimulate inflation-money-supply growth.
On Jul 04 11:33 AM irondoor91 wrote:
> The two more crowded trades discussed in the responses to this and
> other articles are:
>
> 1. inflation/hyper-inflation is inevitable and is just around the
> corner.
> 2. Buy dividend-paying stocks now because the yields are high.<br/>
>
> I would like to point out the following bits of data:
>
> . If inflation is either high or coming at you like the inevitable
> freight train, why has gold not responded? Is there anything that
> has been shouted from the roof-tops any more than "gold is going
> to $1500 or $5000" by the pitchmen on TV and radio? Not only do they
> urge you to buy gold, they want you to buy gold coins or bars. Try
> spending them at the local grocery or turning them into cash at anywhere
> near what you paid these hucksters.
>
> . The dividend yield on the Dow 3.36%. This is not even as high as
> the approximately 4% yield at major tops in the years prior to 1980.
>
>
> If dividends were to stay the same, a 50% drop in stock prices would
> bring the Dow's yield back to the aea where it was at the bottoms
> of 1942, 1949, 1974 and 1982. But, of course, dividends will not
> stay the same. Companies are cutting dividends and will cut some
> more. So the falling stock market wil chase an attractive dividend
> yield. This will not end until prices get ahead of dividend cuts
> and the Dow's yield goes above that of 1932, which was 17%, or until
> dividends fall so close to zero that the yield is meaningless.<br/>
>
> . The P/E ratio of the S&P 500 was approximately 115 to 1 at
> the end of the March quarter. What's going to bring it back into
> line? At major bottoms in the 20's, 40's, 70's and early 80's, the
> the P/E was as low as the 6-8 range.
>
> . The mutual fund cash/ assets ratio has climbed a bit from its historical
> low in 2007 (the market's alltime high). At major buying opportunties
> over the pst 30 years, this ratio has been double where it is today.
> All these managers are hoping for higher prices ahead, but it is
> not likely to happen until this presumption is destroyed and they
> become worried enough to raise cash in the aggregate. When the cash/assets
> ratio hits 15%, that would represent a bullish buying signal.
On Jul 02 02:41 PM SW Richmond wrote:
> Bill Gross checks in to reinvigorate deflation-thesis, help stick-save
> the Treasury market one last time, and generally talk his book. Spare
> me.
>
> Treasuries are the final bubble. Ever since the recent Treasury market
> dustoff, with yields on the ten-year rapidly rising and foreign buyers
> getting nervous, we've seen a rising drumbeat of articles, pundits
> and discussions about deflation. Deflation-thesis is the only antidote
> the Fed and its lackeys have for the obvious inflationary implications
> of the Treasury's borrowing needs going forward.
>
> Nearly all "news", pronouncements by co-opted insider pundits, MSM
> blather, currency discussions, tax hike talk etc must be understood
> within the context of its effect on saving the Treasury market.<br/>
>
> When the Treasury market blows up, you'll know.
In a 'normal' downturn you would be right to be heavily in healthcare. However this is not a normal downturn. It's being dramatically exascerbated and distorted by copious government activitism. Your dividend paying healthcare companies are 'evil profiteers' raping the 'poor' and 'disadvantaged' in this country according to this administraton and they will not let that stand. All those you list will be 'too big to not cooperate' as The ONE has stated he wants corporation to 'work with him'.
You may question why believe this seemingly partisan note? 'He won't go that far, (will he).' Well, if you want to see how far this administation will go to meet its political agenda, look not further than his siding with Castro, Chavez, Ortega and the rest of this hemisphere's Marxist. Profit is evil. Redistribute. Kiss you beloved healthcare generated dividends good-bye.
To be constructive, look for dividends from companies domiciled in free-market friendly countries in basic commodities industries. BP, BHP and the like.
On Jul 03 09:07 AM Arthur Hau wrote:
> The entire pharmaceutical and health care sector has a super low
> average P/E and a super high average yield. And yet it is plagued
> by super low prices.
>
> On the one hand, you have H1N1 all over the place. On the other hand,
> you have JNJ expanding it market share in the rest of the developing
> world. Hey, people, can Obama's health package drive PFE and MRK
> into another GM? Even the bankrupting AIG is worth more than a few
> bucks. Can PFE be as bad as the used-to-be-insurer speculator? <br/>
>
> Is the market crazy or am I stupid?
>
> I have put a quarter of my eggs into the healthcare basket, PFE,
> MRK and JNJ. Yeah, I am betting on high earnings and high yields.
>
>
> "Investors should stress secure income offered by bonds and stable
> dividend-paying equities."
>
> No, I have no bonds. Never put money into 10- or 30-year bonds. They
> are subject to heavy capital loss when the interest rate finally
> rises. Does anyone here believe there is another 10 years of lower-than-three-percent
> average interest rate? I don't!
By rule, dividend-bearing stocks are always good to hold during a bear market. However, unless you are able to actively manage your positions, you are best to stay out of the market altogether and wait until the next bull market period, which will not come for many years.
As for bonds, only a bond salesman would recommend them now. With interest rates at record lows, where do you think rates are headed? Add to that the inflationary pressures due to the bailouts and Obama's stimulus package(s), and we will be looking at double-digit rates in a few years. The best advice for most investors is to STAY OUT of the capital markets altogether and wait for rates to spike, then buy CDs.
And if you want bonds at some point, I sure wouldn't recommend bond funds since the fees are outrageous. Have a look at Gross' performance versus the fees and calculate the percentage of fees relative to the gross returns..around 33% fees..OUCH.
www.avaresearch.com/ar...
Read that article and you will see what I mean.
If you DO want bonds or dividends, you should consider closed-end funds. The fees are lower, there is more transparency, and you have daily liquidity, unlike bond mutual funds. You don't hear these realities because the mutual fund industry spends billions of dollars buying ads and commercial time from TV and print media.
I'm here to set the record straight, as always.