November 15, 2013
Written by Roger S. Conrad
Still think utilities are bond substitutes? Check out my table comparing changes in the benchmark 10-year Treasury note yield with 21 years of annual returns on the Dow Jones Utility Average and the S&P 500 Telecom Service Index.
Here are the chief takeaways. Both the Telecom and Utility indexes rallied in 14 of those years and lost ground in four. Three times, one gained while the other lost.
In the 14 years both indexes rallied, interest rates finished lower than they began eight times. Six times, however, they rose while utilities and telecoms rallied. Ironically, the most dramatic case is year-to-date 2013.
The four times both stock indexes lost ground, interest rates finished the year higher only once, in 1994. That was also the year when the utility and telecom industries were threatened by prospective deregulation. The benign resolution of deregulation issues was the real reason for the rally that followed in 1995. And in 2008, 2002 and 2001, utilities and telecoms dropped even as interest rates fell sharply. Read More »
October 18, 2013
Written by John Buckingham
It is interesting to watch all of the hand wringing related to fears of an eventual tapering of the Federal Reserve’s controversial Quantitative Easing program. While many have questioned the effectiveness, Ben Bernanke & Co. have been buying $85 billion per month of mortgage-backed securities and longer-term treasuries in an effort to stimulate the economy by maintaining downward pressure on longer-term interest rates, supporting mortgage markets and helping to make broader financial conditions more accommodative.
Certainly, we can’t argue with the fact that the 1.6% yield on the 10-year U.S. Treasury seen in early May provided less competition for equities than the current 2.6% level, but we have long believed that the Fed will require a significantly stronger economy (hardly a negative backdrop for corporate profits) before it actually would consider tightening monetary policy. The statement following the Federal Open Market Committee meeting on September 18 said as much: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” In short, the Fed is likely to remain friendly for the foreseeable future. Read More »
August 16, 2013
Written by Richard Moroney, CFA
“With investors adjusting to the prospect of rising interest rates, high-yielding stocks sat out the latest leg of the market’s rally. S&P 500 stocks averaged a 6% total return over the last three months, while those with dividend yields above 3.5% averaged a loss of 2%.
“But, on average, the median 12-month return of stocks with dividend yields in the top one-fifth of the S&P 500 Index has exceeded the median for all S&P 500 stocks by 1.8% since 1992. In the past five years, dividend yield has done even better, outperforming by an average of 2.7%. Relative to the median S&P 500 stock, dividend yield ranks as the sixth-most-effective factor in Quadrix in the past five years and ninth since 1992. But returns of the top yielders were volatile compared to those of most other Quadrix factors. A high-yield strategy tends to steer investors toward cheap companies with shareholder-friendly policies. It can also push investors into the dregs of the stock market. Sometimes a prized yield becomes an unwieldy albatross, with the dividend draining a company of the cash needed to reinvest in itself to sustain operating momentum, or to shore up the business during difficult periods. Read More »
June 14, 2013
Written by John Buckingham
“We are in a very interesting period in which poor economic data is actually viewed somewhat favorably by equity investors (as was the case following Monday’s PMI news) in that weak stats suggest that Ben Bernanke & Co. will delay the start of the tapering of its Quantitative Easing program, while fears of having to ‘Fight the Fed’ increase when positive economic numbers are released. Illustrating the latter, stocks plunged on Wednesday, due in part to the ISM Non-Manufacturing report.
“This gauge of activity (also known as the NMI) in the service sector, which is far larger than the manufacturing sector, came in better than expected: ‘The NMI registered 53.7 in May, 0.6 points higher than the 53.1 registered in April. This indicates continued growth at a slightly faster rate in the non-manufacturing sector.
“Happily, we suppose, much of the economic data in recent weeks has been mixed, just like the two ISM reports, with a few pundits throwing around the term Goldilocks to describe the state of affairs. By this, they mean that the economy is not too hot for the Fed to tighten and not too cold to slip back into recession. For another illustration of the point, we need look only at Friday’s all-important employment report.
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May 17, 2013
Written by Marvin Appel, Ph.D.
“How much do you need to retire? (Or, if you are already retired, how much can you safely spend?) These are the most important financial questions that our clients face. Although each family’s situation may call for a different answer, there are some guidelines that will serve most investors well.
“In October 1994, William Bengen published an article in the Journal of Financial Planning in which he analyzed (using Ibbotson data) how much an investor with 50% in the S&P 500 and 50% in intermediate-term Treasury notes could safety withdraw without depleting his savings. He found that for all 30-year periods covered within the data available to him, an investor could withdraw 4% of principal initially and increase that amount with inflation without running out of money. Subsequent to the publication of his study, it turned out that investors who had started drawing on their retirement assets in the mid-1960s would have run out of money in less than 30 years after the ravages of the 1966-1982 period (when inflation outpaced stock and bond returns).
“The problem with the conclusions of that study is the doubt that stocks and bonds will match their long-term historical returns in the future. This is especially true in the case of bonds where the historical return of 5.4%/year total return in the Ibbotson series is mathematically improbable with interest rates as low as they are now.
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April 18, 2013
Written by Chloe Lutts Jensen
In today’s Income Insights, in an article excerpted from The MoneyLetter, The Investment Reporter Editor Marc Johnson lays out some of his rules for designing a growth-and-income portfolio that won’t expose you to too much risk.
“Trying to squeeze income and capital growth from a single portfolio is the right choice for many investors. At the same time, however, it can lead to costly errors. But you can do it if you pay attention to some basic rules.
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