Earlier in the year, high-dividend stocks were all the rage with investors. It seemed as if buybacks were yesterday’s news, and that dividends were the new high-yield scenarios. Now, however, the tables are turning.
Stocks that are rich in dividends are beginning to take a backseat to those which offer a faster payout for investors, and much of this has to do with the fact that Treasury yields have increased. Yields on the 10-year note jumped 46 basis points at the end of May, leading to 2.13%, as MarketWatch reports. This puts the Treasury in its worst place since December of 2010.
Last week was relatively tough across the board for equities, as the Dow fell 1.2%, the S&P fell 1.1%, and the NASDAQ fell 0.1%.
A Shift in Investor Activity
When 2013 first kicked off, investors were looking toward high-yield stocks as the preferred route to take. The telecom and utilities sectors found themselves up towards the top of the list, and investors considered them to be the perfect defensive stocks.
As the year has progressed, however, all of this has changed.
Instead of high-dividend stocks taking precedence, those which offer no dividend are performing better at the moment. In the month of May, for example, companies such as Advanced Micro Devices (NYSE: AMD) and Micron Technology Inc. (NASDAQ: MU) saw gains of over 10%, while stocks featuring dividends of 4% or more actually fell by 10% or more, according to MarketWatch. It’s a striking comparison, and one that speaks as a sign of the times.
Many believe the activity of Fed chairman Ben Bernanke and his bond buying program is behind this shift in investor attitudes. It seems as if high-dividend stocks have been plummeting ever since the Fed issued a statement saying it would likely begin to slow the pace of its bond buying program, and the sea change may not yet be over. Economic data will continue to shift as June progresses, which will likely cause investor activity to shift even further in this direction.
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Why High-Dividend Still Matters
High-dividend stocks may be taking a backseat to the alternatives at the moment, but that is not to say they are completely worth shunning. After all, the first quarter of 2013 saw defensive stocks performing quite well, and for good reason.
Since 2000, problems have shown up for nearly 50% of companies in a sample of over 200 top buybacks, which has led many to view defensives as safer long-term bets.
Gains in no-dividend stocks have also been quite low in the past, leading high-yield stocks to be preferable for a period of time. Stock buybacks used to be well-received by investors (and that is starting to happen once again, it appears), but because gains began to dwindle, many were looking poorly on them and switching over to defensives instead. After all, if a buyback goes wrong, investors lose out, and no one wants to put himself in such a position.
It is a strange time for investors, then, as the decision to go with either high-dividend or no-dividend stocks is perhaps more important now than it has been in a long while. At the present time, most investors are looking for ways to incorporate both options into their portfolios, paying close attention to the fact that high-dividend stocks still hold some importance as defensives, and that no-dividend options could make a shift for the worse at some point in the future. It’s a tricky, somewhat convoluted scenario that begs one to make a decision, yet also calls for a calm head.
The real decisions will come as the state of the market becomes more apparent. With a strong start to 2013 yet a faltering period last week, it’s tough to tell exactly how the market will perform for the rest of the year. Regardless, investors are keeping a close eye on how the events fold out and shifting their decision-making processes accordingly in order to keep up.
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