32 BARRON’S October 21, 2019
INCOMEINVESTING n ByLawrenceC.Strauss
Dividends’ Sweet Spot
Lowbondyields,stablegrowthbooststocksthatpay
Much has been made about how divi-
dend stocks have benefited from low
bond yields. The odds are that this tail-
wind from low rates will continue for
the time being, though any sign of a big
growth slowdown in the U.S. would
change the picture quickly.
The 10-year Treasury note’s yield
was about 3.2% last November but has
since declined significantly, making
stock dividend yields more attractive
relative to those of many bonds. The
S&P 500 index’s average yield is about
2%.
The 10-year Treasury yield was
about 1.5% early this month, but it has
since climbed about 25 basis points, or
0.25%. Bond prices and yields move in
opposite directions.
Keith Lerner, chief market strategist
in the private wealth unit at SunTrust
Advisory Services, expects the 10-year
Treasury yield to push toward 2% by
year’s end, “assuming that trade ten-
sions do not escalate and we do not get
a surprise on Brexit.”
Lerner says that rates moving
higher “from these very low levels [is] a
sign of increasing investor confidence in
regards to global growth stabilizing and
unwinding part of the fear trade.”
Greg Hahn, chief investment officer
of Winthrop Capital Management, ex-
pects10-yearyieldsof1.75%to2%head-
ingintotheendof2019.Hesaysthere-
cent drop in the 10-year Treasury yield
was more about trade concerns than
abouteconomicfundamentalsintheU.S.
On the corporate front, Hahn expects
third-quarter earnings growth to slow,
but notes that cash flow remains strong.
“A diversified portfolio of high-quality
dividend-paying stocks should yield
around 2.65%,” he says.
If the 10-year Treasury’s yield moves
up to about 2% amid a solid economy,
Lerner favors sectors such as financials
and parts of the industrial sector that
“would do better with stabilization in
global growth, as opposed to the pure
bond proxies, such as utilities, which
may underperform if rates rose.”
Still, some observers expect the envi-
ronment to remain ripe for lower bond
yields. That should help dividend stocks
overall.
Dan Fuss, a fixed-income manager at
Loomis Sayles, anticipates that interest
rates will move lower, partly owing to
the appetite of foreign investors for
higher-yielding debt in the U.S. He ex-
pects the 10-year Treasury’s yield to
touch 1.5% or lower by year’s end.
“The primary thing is the Fed’s pol-
icy,” he says. “If they go ahead with one
or more cuts at the short end, that will
be reflected further out on the curve.”
The Federal Reserve has already cut
interest rates twice this year, at meet-
ings in late July and in September—
each time by a quarter of a percentage
point. Markets are increasingly wager-
ing that the Fed will cut its interest-rate
target again at its meeting later this
month, with futures markets recently
pricing in an 86% chance of a quarter-
point rate cut.
Low rates are generally benign for
dividend stocks, though some sectors
face more difficulties than others in
such a scenario. One is banking, which
must contend with lower net-interest
margins.
Ultralow rates could also signal
problems. If the 10-year Treasury yield
falls below 1.4%, “it would
be a sign of investors
fearing a recession,” Ler-
ner says. “We’re still in a
sweet spot for where
rates are. If the economy does OK, and
rates move as a reflection of that, that’s
a positive sign.”
As long as this Goldilocks scenario of
rates that aren’t too high or too low per-
sists, many dividend stocks should con-
tinue to benefit.
Dividend
Payments,
pageM35
10-year Treasurys recently
yielded around 1.75%.
By contrast, the S&P 500’s
average yield is about 2%.
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