Where do investors turn for income in a yield-starved world?
There is a not-so-cynical view that Bernanke, Draghi and the other central bankers around the world have knocked interest rates so low to force investors into more speculative arenas to collect yield. Bonds and note yields are at or below the rate of inflation. And forget about CDs or passbook savings - these returns look like rounding errors for zero.
Even mom & pop investors have been forced into the stock market (helping fuel this rally) in search of yields and income. How do we know this? Because traditionally staid, plodding companies have been performing like growth stocks!
In the end of my April article, "I Can't Believe It's Not Cyclicals", we discussed how traditionally defensive or counter-cyclical sectors like health care, utilities and consumer staples had been leading the charge in an up market. We showed how this pattern was very different relative to other recent bull runs. In that article, I suggested that the run up in defensive stocks would end when retail investors were convinced that the bull would last "forever" and then start rotating into higher beta cyclical sectors like technology and materials.
In the subsequent article, "Are We Unwinding the Defensive Trade?", we saw this sector rotation is actually happening. The same logic applies to stocks that investors have bought for yield - they have helped underpin this rally and are now starting to unwind as market participants chase returns more earnestly. Let's look at some of the evidence for this trend and discuss where it might lead us.
P & G Imitates Google and Other Yield-Starved Anomalies
Back when it still held a government-allowed monopoly, American Telephone & Telegraph was known as the stock "for widows and orphans." It was a safe haven - a defensive stock that threw off a nice dividend. The same can be said for the telecom sector as a whole in the post-breakup era. While more volatile than utilities, they have the perception of a slow growth area with a service everyone needs (of course, many of the major telecoms have ventured into cellular, internet, TV and other areas - but we're talking perception vs. reality here…). Both AT&T (Symbol:T) and Verizon (Symbol:VZ) throw off nice dividends of 4.9% and 4.0% respectively. And like many dividend stocks, they rallied during the first part of the year but have started to sputter during the latest up leg - along with other defensive stocks. Let's take a look:
We can see this same phenomenon with many of the dividend darlings. Practically all of the utilities (Duke, Southern, American Electric Power, Consolidated Edison, etc.) and many consumer staple stocks (Clorox, Walmart, etc.) look similar.
One stock that got a lot of attention in the first quarter was venerable Proctor & Gamble. It's list of products is a veritable "Who's Who" of consumer products: Tide, Crest, Pampers, Head & Shoulders, Charmin and Bounty to name just a few. Over a century and a half old, this company had an impressive 6% revenue growth posted for the last year. Yet, over the past six months, its Price-to-Earnings ratio has been running from 17.5 to 19 - in the zone of growth stock! Even this dividend blue chip, though, has seen investors rotate away in the last few weeks of market run-up:
Of course, all dividend stocks haven't topped. Lockheed Martin (symbol: LMT) and Johnson & Johnson (symbol: JNJ), for example, have kept making new highs along with the market. But the broader rotation is certainly away from the defensive and dividend plays and into traditional cyclical sectors. With that type of activity, the little bit of cash that remains on the sidelines can finally come in to chase returns. We can start to look for some market topping action, but as long as our central banks keep the spigots wide open, the markets can remain in turbo mode for much longer than the bears think is reasonable.