Bank of America: Dividend-Stock Strategy May Gain Momentum

Friday, 01 Oct 2010 07:10 AM

 

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The leadership of high-yielding stocks is far from over because the group is the least liked by fund managers while poised to gain popularity among a growing population of aging Americans, Bank of America Corp. said.

Utilities and phone companies, which offer the highest dividend yield among the Standard & Poor’s 500 Index’s 10 industry groups, are owned by mutual funds in the smallest proportion relative to their weighting in benchmark indexes, according to data compiled by Bank of America. Portfolio managers are likely to be forced to raise holdings of those shares as earnings growth slows and more Americans favor stable returns, analysts led by Savita Subramanian wrote in a note dated Sept. 28.

“We’re still in the early stages of building interest, given that dividend yield still remains a somewhat underutilized investment theme,” Subramanian said. “When profits growth grows scarce, investors tend to seek out companies with stable earnings and avoid companies with volatile earnings growth. Companies with strong and stable dividends generally align with this theme.”

The first global recession since World War II prompted investors to seek safety in fixed-income assets. Almost $57 billion was withdrawn from U.S. stock mutual funds from May through August, the most during any four-month period since 2008, according to data compiled by the Investment Company Institute. At the same time, about $100 billion was stashed in bond funds.

Industry-Group Gains

Phone stocks and utility companies, whose dividend yield averages 5.36 percent and 4.28 percent, respectively, have jumped 12 percent and 5.6 percent in the past six months through yesterday for the best performance of the 10 groups in the S&P 500. Companies in the benchmark gauge, including more than 120 that offer no dividend, pay an average of 0.96 percent of their share price to shareholders.

“Companies with attractive and above-market dividend yield are still -- and could continue to be -- a scarce resource,” Subramanian wrote. “Over the next decade, retiring Baby Boomers are shifting in preference from capital appreciation to income. This secular increase in demand creates a compelling case for the relative attractiveness of equities with above average, sustainable and growing dividend yield.”

The analysts said investors should buy Russell 1000 stocks in the second quintile of dividend yield because they are "safe -- but not stretched" and "offer the strongest relative gains over time on a risk-adjusted basis."

Dividends are recovering from the worst year on record in the U.S., where 804 companies reduced payouts by a combined $58 billion, according to data compiled by S&P. Dividends may rise 20 percent through 2012, analysts’ estimates compiled by Bloomberg show.

Profit growth, on the other hand, will slow to 15 percent next year from 35 percent in 2010, the fastest expansion since 1988, according to Bloomberg data.

The slowdown in earnings growth “is generally a tailwind for dividend-yield strategies,” said Subramanian.

© Copyright 2014 Bloomberg News. All rights reserved.

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