Why Have Equity Income Stocks Lagged in Recent Months?
In recent months, high-quality dividend paying stocks have not participated in the strong rally that the broad stock markets have enjoyed. There are two reasons for this:
- First, several months ago many of these securities were trading at valuations well above their historic norm. This overvaluation has generally been corrected.
- Second, interest rates have moved sharply higher in recent months. As a result, dividend yields are now less competitive with bonds.
Many investors have used these stocks as “bond substitutes”, because they are high-quality, and have attractive yields and stable business models. These stocks are generally in the real estate, utilities, telecom, consumer staples sectors, and segments of the energy sector.
Investors who hold mutual funds, managed accounts, and stocks that are focused on this equity income strategy will note that these positions have dramatically underperformed the market much of last year and during the first two months of 2018.
This performance spread between the overall markets and segments within the market, often times referred to as stock rotation, is normal and has come to a point where in many of these higher dividend-paying stocks (and funds and managed accounts that invest in them) are starting to look undervalued. Many of our clients own some of these types of stocks in one account or another, particularly clients who are relying on investment income (often retirees or career changers).
We feel strongly that if this type of investment approach had fit your investment needs a year ago, it still does. The dividends remain attractive (and are generally rising), and their business models are still intact. Accordingly, these stocks make a lot of sense for investors wanting high and rising income, with some protection against rising inflation.
We encourage you to contact us should you have questions or wish to discuss your investment strategy.
Sincerely,
Mustard Seed Advisors
Opinions expressed are not necessarily those of Raymond James & Associates//Financial Services. Information contained was received from sources believed to be reliable, but accuracy is not guaranteed. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Past performance may not be indicative of future results.
