The global economy is being weighed down by a debt problem that took over two decades to create. The leverage that has been built up in the system will not unwind for years to come, and it will continue to lead to significant uncertainty and market volatility. 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 of 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.
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 - As shown in the table below, 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 slow growth, low interest rate environment (e.g., mortgage REITs). We currently believe that agency mREITs offer investors the best risk reward in the space. Note: We recently wrote a more detailed article advocating mortgage REITs in a slow 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."
While this is not an exhaustive list of high-quality dividend stocks, this sample portfolio would yield 5.9% with an average beta of 0.43. In addition, all of these stocks are in defensive industries and they have P/E ratios below 20.
Due to the current market rally (which we believe will be short lived), investors should consider waiting for a pullback in these stocks to enter a new position or to add to an existing position.
Most of the stocks above are currently in a positive uptrend. As such, investors should be looking for near-term areas of support as potential entry points. Below are a couple of examples:
Abbott (ABT) should get some decent support at the $54.00 level. As shown in the chart above, the stock recently broke below the 50-day moving average and it is entering the high-end of our "buy zone." Additional support will likely be found at the 200-day moving average ($52.09).
Buy Zone: $52.00-$54.00
Altria (MO) has been trading in an upward range the past few months, and we believe that this trend will continue for the stock as investors continue to seek good risk-adjusted yield in a low interest rate environment. That said, the stock should continue to get downward support around the 50-day moving average ($28.82), and we think that investors should consider buying MO on any further dips.
Buy Zone: $27.25-$28.25
Annaly Capital Management (NLY) recently broke above the top part of its recent trading range. This breakout was driven by the Fed's recent announcement to keep interest rates low through the end of 2014, which is positive for mREITs. Since then the stock has retreated as the company announced that spreads have narrowed (due to a reduction in leverage). The stock should get near-term support from its 50-day ($16.28) and 200-day ($16.26) moving averages.
Buy Zone: $16.00-$16.50
While AT&T (T) has been range-bound the past few months, the stock traded back above $30.00 a few weeks ago for the first time since July. Even though the stock is now consolidating in the $30.00 area, we think that AT&T will continue its long-term uptrend, and we would be a buyer on any further dips. The 50-day and 200-day moving averages are converging around the $29.00 level, and we think that the stock will get very strong support here.
Buy Zone is $28.25-$29.25.
Southern Company (SO) is in a very strong uptrend, and we think that it should continue on this path for the foreseeable future. The stock is currently getting support at the 50-day moving average ($44.58) and we would be a buyer on any further pullback.
Buy Zone: $41.50-$42.50