Searching For More Income? Find Opportunities In Today's Market
Summary
- Value names remain attractively positioned to benefit from the ongoing macroeconomic recovery and positive outlook. Importantly, the growth-to-value rotation remains in early stages relative to historical cycles.
- The construction of the S-Network Sector Dividend Dogs Index (SDOGX) allows investors to gain exposure to the value trade while enjoying a yield well above broad market indexes. The index has a value tilt by selecting the five stocks in ten sectors with the highest yields and using an equal-weighting scheme.
- For investors desiring greater income and anticipating continued momentum in value, MLPs and midstream stand to benefit given their energy exposure and discounted valuations relative to history.
Finding Income and Value in a Robust Economic Recovery
After many years of underperformance relative to growth-oriented stocks, value names have regained some lost ground, outperforming growth-oriented stocks since November on the back of an improving economic outlook. Companies in cyclical sectors, such as energy and industrials, stand to reap the benefits of stronger earnings outlooks after facing precipitous headwinds in 2020. While renewed lockdowns and setbacks with vaccine deployment in certain countries continue to bear watching, strong economic data from the US remains encouraging. For example, last week's job report far exceeded expectations, as nonfarm payrolls increased by the largest absolute number since August 2020. Furthermore, the Institute for Supply Management's services index rose to an all-time high of 63.7% in March1, marking the tenth consecutive month of growth.
Value names remain attractively positioned to benefit from the ongoing macroeconomic recovery and positive outlook. Importantly, the growth-to-value rotation remains in early stages relative to historical cycles. The construction of the S-Network Sector Dividend Dogs Index (SDOGX) allows investors to gain exposure to the value trade while enjoying a yield well above broad market indexes. Specifically, the index has a value tilt by selecting the five stocks in ten sectors (real estate is excluded) with the highest yields and using an equal-weighting scheme, which results in overweight exposure to economically sensitive sectors like energy, materials, and industrials (read more). SDOGX, which uses the S&P 500 as its starting universe, is up over 16% year-to-date through March on a total return basis compared to the S&P 500's 6.17% gain. For investors desiring greater income and anticipating continued momentum in value, MLPs and midstream stand to benefit given their energy exposure and discounted valuations relative to history (read more).
Current Yields vs. History
Midstream continues to offer yields above historical averages. For the MLP indexes below (AMZ and AMZI), yields are slightly below the 5-year average but more than 100 basis points above the 10-year average.
Among the Sector Dividend Dogs, SDOGX stands out for its strong performance year-to-date benefitting from its value tilt and equal-weighting scheme, while EDOGX is the only index in the suite to offer a current yield above the 5-year average.
Multiple screens for dividend durability, including evaluating cash flows, EBITDA, and debt-to-equity ratios, help ensure reliable income from the durable dividend indexes. While current yields are below the 5-year average, the income profile is more attractive than a broad equity market index like the S&P 500.
Though current yields are below historical averages, closed-end funds continue to represent an attractive option for enhancing the yield of an income-oriented portfolio.
Footnote:
1 A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity.
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