Despite projecting that the S&P 500 Index (SPX) will close 2019 at 2,900, roughly unchanged from the Sept. 3 open, Bank of America advises investors to "stick with stocks--if only for the dividends," in a report released today. "The asset allocation decision remains easy for us. Stocks are still cheap relative to bonds, and in a yield-scarce world, 60% of S&P 500 stocks have a dividend yield above the 10yr. [U.S. Treasury Note]," they write.

"Driven by declining yields, high dividend yielding stocks have outperformed low dividend payers since late July," observes Dennis DeBusschere, a leader of the portfolio strategy team and investment policy committee at investment banking firm Evercore ISI, in a note to clients quoted by CNBC. He sees "further upside for dividend payers as nominal bond yields remain depressed."

Occidental Petroleum Corp. (OXY), which yields 6.7%, and drugmaker AbbVie Inc. (ABBV), with a 6.5% yield, are cited by CNBC as examples of high dividend stocks that may outperform going forward. Another alternative suggested by CNBC is dividend-focused ETFs, the three largest in terms of assets being the Vanguard High Dividend Yield ETF (VYM), the SPDR S&P Dividend ETF (SDY), and the iShares Select Dividend ETF (DVY).

Key Takeaways

  • Amid low interest rates, high dividend stocks are outperforming.
  • The U.S.-China trade war is sending rates down, and raising risks.
  • BofA sees high dividend stocks as the best alternative for investors.

Significance For Investors

Uncertainty generated by the protracted trade war between the U.S. and China has been a major factor driving interest rates down recently, with the yield on the 10-Year T-Note reaching its lowest level in three years last week, CNBC reports. They add that high dividend stocks historically are favored by investors in low interest rate environments.

"Relative to 2Q07's peak, the S&P 500 has more high quality stocks, half the leverage (1.9x net debt/EBITDA vs. 3.7x in'07) and more earnings stability (13% std. dev. of GAAP earnings growth vs. 25% in '07)," BofA writes. "For long-term investors, valuations suggest +6% annual returns; add 2% for dividends and this beats most fixed income offerings," they add.

Topping the list of stocks with the highest dividend yields are, per oil and gas storage and transport company Martin Midstream Partners L.P. (MMLP), 28.90%, real estate investment trust (REIT) Tremont Mortgage Trust (TRMT), 20.42%, and Credit Suisse Nassau X Links Crude Oil Shares Covered Call ETN (USOI), 19.36%. Note that high yields may indicate high risks.

Looking Ahead

Trade tensions, Federal Reserve interest rate policy, and U.S. tax policy remain risks for stocks going forward, BofA says. Moreover, "2Q YoY EPS growth would have been negative for the first time since 2016 absent buybacks," they add.

Additionally, the report finds that economic policy uncertainty in the U.S. has hit a three-year high, and notes that high policy uncertainty tends to increase stock market volatility. Regarding policy uncertainty, the report also looked at the effect of President Trump's tweets on the market since 2016. On days when he tweets more than 35 times (which happens 10% of the time), the market is down on average, but it is up on average when he issues fewer than 5 tweets (which also happens 10% of the time).

New tariffs announced by Trump in August increase the downside risks for S&P 500 EPS growth through 2020, may damage business confidence and consumer confidence significantly, BofA warns. "Tread cautiously," the report concludes.