Stocks have rallied sharply during January after the last-minute congressional compromise on the fiscal cliff. While the deal was far from perfect, it averted not only a disaster for the U.S. economy, but also a potentially painful hit to risk-asset markets. With the Treasury bond market at perhaps the most overbought level ever, and corporate investment grade bonds also expensive, those who continue to avoid buying stocks may soon regret it. Bank of America/Merrill Lynch chief economist Ethan Harris offered three very compelling reasons to own stocks now and going forward. In addition, Harris noted the danger of owning Treasury bonds.
To some it may seem a little after the fact to be extolling the virtues of owning stocks with the S&P 500 hovering around 1,500, which is a five-year high. However it is important to remember that we have been in a secular bear market for the past 13 years. As we pointed out yesterday, when the transports start to break out and offer sector leadership, the long bear market may be coming to an end.
The push from bonds (interest rate risk): The historically low level of bond yields offers a bleak outlook for fixed income returns and significant interest rate risk for bondholders. If the 30-year Treasury yield, which is currently 3.1%, were to rise above 3.32%, the return over the next 12 months would be negative.
The pull from equities (attractive yield): Global equity dividend yields and payout ratios have been on the rise in recent years, and the removal of uncertainty regarding tax policy strengthens the case for owning dividend stocks.
Investors are far from being “all-in”: Recent fund flow data shows early signs of investor rotation from bonds to equities, but the stubborn preference for exchange traded funds over long-only funds indicates cautious, rather than confident bullishness. Moreover, a long-run look at positioning shows that investors have shunned equities in favor of bond funds (which saw record inflows in 2012).
With these three solid reasons as backup, here is a list of Bank of America/Merrill Lynch Buy-rated stocks with dividend yields that are higher than their own corporate debt. We screened the names to find the top 10 highest yielding stocks in this universe.
- GlaxoSmithKline PLC (NYSE: GSK) yield 5.20%
- Bristol-Myers Squibb Co. (NYSE: BMY) yield 4%
- Sanofi S.A. (NYSE: SNY) yield 3.50%
- AbbVie Inc. (NYSE: ABBV) yield 4.20%
- Philip Morris International Inc. (NYSE: PM) yield 3.80%
- Microsoft Corp. (NASDAQ: MSFT) yield 3.30%
- Intel Corp. (NASDAQ: INTC) yield 4.30%
- BP PLC (NYSE: BP) yield 5.53%
- Kraft Foods Group Inc. (NASDAQ: KRFT) yield 4.30%
- General Electric Co. (NYSE: GE) yield 3.50%
With interest rates almost certain to rise at some point, money that flowed into bond funds will come out and search for a home in stocks. It makes sense to get involved before and not after rates go up.