An under-the-radar market signal just crossed a crucial threshold. Here's how you can profit from the surprising shift.
Reuters / Brendan McDermid
- Dennis DeBusschere, an Evercore ISI strategist, says investors hunting for income may want to readjust their strategies due to the convergence between stock and bond yields.
- According to FactSet, 44% of S&P 500 companies are now trading with dividend yields greater than the US 10-year note's yield.
- Click here for more BI Prime Stories.
The biggest money-making opportunities are often hidden in plain sight.
Investors frequently fall prey to this mantra, sacrificing tried-and-true simplicity for flamboyant, overtly-swanky strategies. The desire to invest in exotic and unconventional strategies can lead down a road of peril, exacerbating unforced errors in an attempt to outperform. When the craving for sophistication outweighs rational allocation, it's time to get back to basics.
According to Dennis DeBusschere, an Evercore ISI strategist, the time for stock-market investors to reassess their holdings is now.
That's because the big move lower in the 10-year yield last month pushed it below the S&P 500's dividend yield for the first time since late 2016, he said. According to FactSet, 44% of S&P 500 companies are now trading with dividend yields greater than the US 10-year Treasury, revealing a juicy opportunity for those willing to bear the risk.
"As odds of a Fed rate cut in July move higher (~80% today), the attractiveness of dividend paying stocks has increased," DeBusschere said. This suggests that if the trend continues, a sustainable dividend-growth strategy will outperform a basket of government-backed debt.
The chart below depicts the relationship between the S&P 500's dividend yield and the 10-year note.
When stocks yield more than bonds, dividend-oriented investors can enjoy a return better than that of government debt, with the added bonus of being able to reap the rewards of stock appreciation - something that debt investors do not have access to.
Potential profit can be garnered from this phenomenon by favoring high-dividend yielding securities over government-issued debt. When US Treasury yields are this compressed - even if stocks churns sideways for years on end - high-quality, high-dividend-yielding stocks still have the potential to outperform.
However, the strategy does not come without risks.
The most obvious one is that any stock - regardless of its dividend yield - has the potential to fall precipitously, leaving investors with deep principal losses; therefore, be cautious in your selection.
With US government debt essentially yielding peanuts on an inflation-adjusted basis, starved-for-yield investors will continue to search all corners of the market for a viable return. It may be time to reassess the genesis of your income-producing assets.
"We suggest dividend mandated investors focusing on dividend stocks with relative high Growth exposure to offset the headwind from Value underperformance," DeBusschere said.