Tuesday, January 22, 2013

Income Sources

I was concerned a year ago that dividend stocks had become too much in vogue--and historically expensive versus the stock market overall--even though they remained attractive versus bonds.  And has usually happens when an asset is relatively expensive, the return on dividend stocks lagged the stock market overall in a strong year for equities.

I think the dividend stocks again are relatively attractive, but on a more selective basis, for income-oriented investors.  In Europe, for example, the Euro Stoxx 50 Index is up 33% since mid 2012.  Yet, the average dividend yield is 3.5%, while the yield on the 10-year German government bond is only 1.5%.  Even compared to corporate bond yields, the average dividend yield is 40% higher than the yield on investment-grade corporate bonds.  Both yield spreads are historically high in favor of equities.

So when a stock like Total (TOT) still yields 5.6%, there is value there.  GDF Suez (GDFZY) yields nearly 10%, and the stock is down 25% over the past year (and 67% over the past five).  I would be comfortable holding both of those stocks.  But since I think stock prices overall are likely to decline, I would hedge long positions by going long volatility or purchasing put options on the the major market indexes

Steve Lehman

S & P 500:  1483
TOT:  52.5
GDFZY:  20.5

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