The global economy is being weighed down by a debt problem that took over two decades to create. Parsimony believes that investors need to understand the past in order to invest for the future. Given the significant build-up in peace time debt, we believe that the debt problem will take years to sort out providing significant uncertainty and market volatility. The leverage that has been built up in the system will not unwind for years to come. Over the past 35 years, global policy has been to increase sovereign debt with each problem. We believe that sovereign balance sheets do not have room for further expansion. The inability for sovereigns to lever-up leaves economies venerable to exogenous shocks. This risk to shocks will force monetary policy all over the global to remain accommodative.
As central banks drive down short-term rates to deal with high debt levels and low growth rates, investors have to go out the risk spectrum in search of yield. Click to enlarge Source: Citigroup Income-Focused Portfolio As sovereign debt is losing its perceived “risk-free” label, we think that investors should focus on generating yield from high-quality dividend stocks. As opposed to government bonds which simply provide a fixed rate of return over bonds held to maturity, corporate management teams are focused on building shareholder value. We remain defensive and advocate an income portfolio focused on:
- High quality, low beta dividend stocks - PE ratios remain modest for many high quality U.S. companies and our focus is on companies that have pricing power and can survive in a low growth environment.
- High yield stocks that will perform in a low growth, low interest rate environment (e.g., mortgage REITs). Note: We recently wrote an extensive article advocating mortgage REITs in a low growth environment (High Yield In A Slow-Growth World: Mortgage REITs).
Below is a sample list of high-quality stocks that should continue to generate stable income during the "Great Deleveraging."
As shown in the table below, the companies on the list above have a solid track record of dividend growth over the past 5 years. Note: AGNC was founded in 2008.