Wall Street Week Ahead: Prospect of Fed cut pushing dividend investors
into tech, energy
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[July 19, 2019] By
David Randall
NEW YORK (Reuters) - An expected interest
rate cut by the Federal Reserve later this month is pushing
yield-oriented U.S. fund managers further afield in search of income at
attractive prices.
While nearly half of the companies in the S&P 500 have a higher dividend
yield than the roughly 2.04% yield that benchmark 10-year Treasuries now
offer, value-conscious fund managers say they are hesitant to buy shares
of companies in dividend-rich utilities or the real estate sector
because their valuations are well above historical norms. Instead, fund
managers say, they are picking up yield in sectors ranging from energy
to technology.
"You can't just throw a dart because some of these typical safe-havens
are trading at much higher market multiples than they typically do,"
said Gary Bradshaw, a portfolio manager of the $25 million Hodges Blue
Chip Equity Income fund. "It's hard for me to buy a utility company when
I could buy a company like Home Depot," which increased its dividend by
32% in March and will likely benefit from a pick-up in the housing
market, he said.
Shares of Home Depot Inc <HD.N> yield 2.52% and are up nearly 25%
year-to-date, as of Thursday's market close, compared with a roughly 18%
gain in the benchmark S&P 500 over the same period. The S&P 500 as a
whole yields 2.38%.
With negative bond yields in Japan and Europe, the Fed will likely keep
U.S. interest rates low for a "very long time," Bradshaw said, putting a
premium on companies that can grow their dividends and maintain their
yields.
Other fund managers are rotating out of the bond market in search of
income from equities, which they say appear to offer more sustainable
sources of yield.
"Obviously, equities are yielding more than bonds here and that's the
game that everybody has to play," said David Clott, a co-portfolio
manager of the $1.3 billion Westwood Income Opportunity fund. "The low
yields in the fixed-income market are making you take risk elsewhere."
As a result, Clott has been reducing his exposure to Treasuries and
adding shares of companies like AT&T Inc <T.N>, which yields 6.13% and
has a trailing price-to-earnings ratio of 12.9. Shares of the company,
which plans to launch a streaming service next year to compete with
Netflix Inc <NFLX.O>, are up 16% for the year-to-date.
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A sign is seen on Wall Street near the New York Stock Exchange June
15, 2012. REUTERS/Eric Thayer (UNITED STATES - Tags: BUSINESS)
Robert Leininger, portfolio manager of the $2.4 billion Gabelli Dividend &
Income Trust closed-end fund, said he has been adding to his stake in companies
such as alcoholic beverage company Molson Coors Brewing Co <TAP.N> and energy
giant Schlumberger NV <SLB.N> whose share prices have underperformed this year.
Molson Coors, for instance, is down 3.8% for the year-to-date and offers a
dividend yield of 3.02%, while Schlumberger is up 5.5% over the same time and
yields 5.18%.
"It's been a market that has been focused on growth investing for close to a
decade now," Leininger said, unduly punishing otherwise-strong companies that
may hit temporary road bumps.
Michael Barclay, a portfolio manager of the $15.1 billion Columbia Dividend
Income fund, said he is focusing on picking up income in the technology sector
because its strong growth rates will allow companies to increase their dividend
payments over time.
While Cisco Systems Inc <CSCO.O>, Microsoft Corp <MSFT.O> and Apple Inc <AAPL.O>
are among his fund's largest holdings, Barclay has also been looking more
recently to semi-conductor companies, which are insulated by high barriers to
entry and have high free cash flows at a time when other high-dividend sectors
like consumer staples have been increasing their leverage.
"At this point in the cycle, it's really important to focus on the balance sheet
and have as much confidence that you can that a dividend is not going to be
cut," he said.
(Reporting by David Randall; Editing by Jennifer Ablan and Leslie Adler)
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