(Bloomberg) More U.S. stocks are paying dividends that exceed bond yields than any time in at least 15 years as profits rise at the fastest pace in two decades.
Kraft Foods Inc. and DuPont Co. are among 68 companies in the Standard & Poor's 500 Index with payouts that top the 3.80% average rate in credit markets, based on data since 1995 compiled by Bloomberg and Bank of America Corp. While Johnson & Johnson sold 10-year debt at a record low interest rate of 2.95% last month, shares of the world's largest health products maker pay 3.66%.
The combination of record-low interest rates, potential profit growth of 36% this year and a slowing economy has forced investors into the relative value reversal. For John Carey of Pioneer Investment Management and Federated Investors Inc.'s Linda Duessel, whose firms oversee $566 billion, it means stocks are cheap after companies raised payouts by 6.8% in the second quarter, data compiled by Bloomberg show.
"That's the tug-of-war that's going on right now," said Peter Vanderlee, a money manager at ClearBridge Advisors, a unit of Baltimore-based Legg Mason Inc., which oversees $659 billion. "If we are going into a double-dip recession, maybe we're not as cheaply priced as one would suggest. The other side of it is that if we're just experiencing a slowdown, but we're avoiding a recession, then prices are clearly attractive."
Bond Rally
The last time the number of S&P 500 companies paying dividends above the corporate bond rate approached the current level was in March 2003, data compiled by Bloomberg show. That was just after the start of a bull market in which the equity index more than doubled over five years.
Bank of America Merrill Lynch's U.S. Corporate Master Index has returned 9.5% this year, compared with the S&P 500's gain of 0.4%, including dividends. Since 1995, bonds in the index have yielded an average of 6.2%, compared with S&P 500 dividends of 1.8%.
The relationship flipped after the Federal Reserve cut its target rate for overnight loans between banks close to zero and consumer prices fell by the most in six decades, helping send interest on 10-year Treasury notes as low as 2.42% last month. At the same time, U.S. economic growth forecast to reach 3% this year helped restore equity payouts after the most reductions ever in 2009, based on data tracked by Bloomberg.
Payouts, Upside
Dividend yields were also helped by the 9.3% retreat in the S&P 500 since April 23. The drop pushed the price of the S&P 500 to 12 times estimated profits in the next year, near the lowest since March 2009. That's giving investors a chance to buy stocks that pay more than bonds and offer more potential for price gains, Carey said in a telephone interview from Boston.
"It's an attractive opportunity for people to get positioned in stocks that are paying good dividends and that are selling at relatively inexpensive price-to-earnings multiples," he said. "That's where the valuations are: in the big, blue- chip, dividend-paying stocks."