Dividend yields appear to bolster the case for buying stocks now, but other metrics tell a different story, The Wall Street Journal warned.
“Investors who expect bond yields to stay low and dividends to stay (relatively) high are buying stocks not because they are a bargain, but because they look better than bonds. The dividend bolsters the case that there is no alternative to shares,” WSJ.com’s James Mackintosh
Low bond yields are sending mixed messages to investors.”First, that the outlook for the world economy is grim, meaning they should expect lower returns on all assets in the future. Second, that government bonds are unappealing, so they should invest in riskier assets instead,” he explains.
"The low returns on the longest-dated bonds are extraordinary: 0.3% on Japan’s 40-year government bond, 0.9% on Germany’s 30-year bund, 2.1% on Britain’s 50-year gilt and 2.6% on the 30-year U.S. Treasury bond," WSJ.com reported.
“If these provide an accurate outlook for growth and inflation, we won’t be having much of either for the next couple of generations. Dividends look more and more attractive,” he said.
“Yet the lack of growth and inflation will hurt dividends, too. Investors who expect bond yields to stay low and dividends to stay (relatively) high are buying stocks not because they are a bargain, but because they look better than bonds. The dividend bolsters the case that there is no alternative to shares,” he said.
“Investors who think the bond market or the dividend market is wrongly priced can justify buying shares for the yield. But they could better express their views by betting against bonds or buying future dividends directly via derivatives than by buying into U.S. stocks, which look expensive compared with their own history.”
Meanwhile, David Kostin, chief U.S. strategist at Goldman Sachs, predicted the Federal Reserve will hike interest rates multiple times in the near future. He urged investors to focus on a dividend-focused strategy, MarketWatch
"Stocks with high dividend yield, high dividend growth and low valuation should outperform, irrespective of the Fed's tightening path, help investors 'Stay Alive' in this, precarious market, and avoid the fate of Alexander Hamilton," wrote Goldman's David Kostin in a note, referencing the song in the Broadway sensation "Hamilton."
He remained bullish on Goldman’s "dividend growth" basket. The stocks in the basket have a higher dividend yield than the market (2.8 percent versus 2.1 percent), higher estimated dividend growth for the next two years than the market (12 percent versus 6 percent) and a lower P/E than the market (15 times versus 17.1 times), CNBC
Meanwhile, Forbes.com contributor Brett Owens
offers a cautious warning on dividend stocks.
“Sometimes a juicy high yielding dividend stock isn’t all it’s cracked up to be and unwary investors snap up the bait only to realize their mistake after it’s too late. Remember the old adage, ‘if it looks too good to be true, then it probably is,’” he warned.
“But before you start questioning all high yield stocks, there are telltale signs that a dividend yield could be all smoke and mirrors. One big clue is the dividend payout ratio – the percentage of earnings returned to shareholders in the form of dividends. A low ratio means the stock has plenty of room to keep paying out a dividend or even increase the yield if the company so wished. Conversely, a high payout ratio may be unsustainable putting the dividend yield in danger of being cut in order to maintain profitability.”
(Newsmax wire services contributed to this report).
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