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Zero Interest Rate World - What Are Many Stock Yields So High?


Viking
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Interest rates in most of the world are zero or negative. This is likely to be the case for many years (according to the Fed). Given bonds are yielding so little why are dividend yields for so many decent stocks so high?

 

1.) expectation interest rates will be materially higher in the near future

2.) investors only wanting to invest in FANG type stocks

3.) Mr Market has not figured it out yet (market is not efficient)

4.) there is no mispricing; high yields reflect company specific issues (market is efficient)

5.) still to early in the recesssion/recovery to buy economically sensitive stocks

6.) other?

 

The current situation reminds me of 1999. Back then, investors only wanted to own .com stocks. Government bond yields were north of 5 or 6%; lots of old economy stocks had very large dividend yields. And it went on for years.

 

A few examples across different industries:

- Telecom: BCE.TO; dividend yield = 5.9% (T?)

- pipelines: TRP.TO; dividend yields = 5.3% (lots of other examples here)

- Energy: SU.TO; dividend yield = 4% (after being cut 55%) (XOM?)

- Financials: TD.TO; dividend yield = 4.9%

- Real Estate: KW; dividend yield = 5.9%

 

What are the best dividend yielding stock situations that you see today?

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Just came across an article discussing how dividend stocks in Canada have performed year to date, which ties into my question asked above:

 

“The iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ), for instance, returned negative 11.9 per cent (all return figures include dividends). The BMO Canadian Dividend ETF was down 11.7 per cent. And the Horizons Active Canadian Dividend ETF (HAL) was off 7.4 per cent. Several other dividend ETFs also trailed the model portfolio.“

 

https://www.theglobeandmail.com/investing/education/article-my-dividend-portfolio-is-bruised-not-broken/

 

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Durable dividends: Canada’s top companies kept payouts flowing in second quarter

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-durable-dividends-canadas-top-companies-kept-payouts-flowing-in/

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6. Interest rates are not really that low. I mean they appear low for the government and perhaps for margin traders but have you looked at the interest rates for personal lines of credit, for actual company issuance of debt, and for mortgages? They are most certainly not 0 or 1%. I would say corporate debt is actually being issued around 4-7% (a large spread between golden borrowers and average borrowers).

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Simple answer is that either the market is pricing in a dividend cut and/or is negative on long term prospects so the high dividend is really a return of capital and you are unlikely to get your principal back. And in sectors where dividends are pretty safe such as utilities and consumer staples you are only getting around a 3% yield that isn't going to grow much and if interest rates eventually normalize there is going to be significant multiple compression. But of course in situations where you think a dividend cut is only going to be temporary or the market is too negative on long term prospects there could be opportunities.

 

 

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A few examples across different industries:

- Telecom: BCE.TO; dividend yield = 5.9% (T?)

- pipelines: TRP.TO; dividend yields = 5.3% (lots of other examples here)

- Energy: SU.TO; dividend yield = 4% (after being cut 55%) (XOM?)

- Financials: TD.TO; dividend yield = 4.9%

- Real Estate: KW; dividend yield = 5.9%

 

What are the best dividend yielding stock situations that you see today?

 

 

- The largest US natural gas transmission/gathering systems: 7.75-8% yields (Williams; Kinder Morgan) -- DCF yields likely into the double digits

 

- The blue chip NGL/refined products MLPs: 10-11% distribution yields (Enterprise Products Partners; Magellan Midstream)

 

- Oil & gas mineral (royalty) owners:  ~9% to double digits (but variable) (e.g., Black Stone Minerals, Dorchester Minerals)

 

- Small NYC-area commercial real estate company consisting of the highest quality building on a long-term lease to a very high quality tenant and conservative balance sheet - 6.75% (Alexander's)

 

I own most of these.  At a high level, all four have the same issue -- not only a potential absence of growth, but a potential perpetual decline into zero terminal value (oil and gas are going away; NYC will never be the same).  But I think you're being fairly compensated to wait and see and I balance things out by trying to find growthier investments for other parts of the portfolio.

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This reminds me of late 1999, when I bought my first 2 stocks.  One was a hot, small-cap tech stock.  The other a cheap, large-cap Utility stock yielding 5%.

 

Suffice it to say it taught me a lot over the following 12 months.

 

I don't want to belabour the 1999 parallels too much, as this time obviously there are a lot of amazing companies making amazing profits, but there are also some pretty crazy valuations out there, and as KJP says, this might be a time to wait it out with a decent yield, until things correct and you have the firepower to take advantage of more reasonable valuations.

 

My only quibble with your post, KJP, is that I believe that NYC will be the same in a couple of years, but I concede this is my own optimistic speculation!

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I hope you're right because I've been buying some high yielding companies using margin and letting the dividends help pay down the margin loan.

 

The last time I employed this approach was in 2012 with a basket of high yielding utility stocks.  I sold way too early, of course.  Hopefully things work out similarly this time.

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I hope you're right because I've been buying some high yielding companies using margin and letting the dividends help pay down the margin loan.

 

The last time I employed this approach was in 2012 with a basket of high yielding utility stocks.  I sold way too early, of course.  Hopefully things work out similarly this time.

 

What kind of companies?

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I hope you're right because I've been buying some high yielding companies using margin and letting the dividends help pay down the margin loan.

 

The last time I employed this approach was in 2012 with a basket of high yielding utility stocks.  I sold way too early, of course.  Hopefully things work out similarly this time.

 

What kind of companies?

 

Kinder Morgan, Altria, Century Link, and Williams Companies.  The amount of margin I'm using is modest (10-20%) because this is a different situation then the utilities in 2012. 

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