For investors, the future is brighter than most believe:
BY CHRIS HANLY
Investment Consultant, Gary Goldberg Financial Services
The harsh reality for investors is that low interest rates are here to stay – in my opinion for many years to come. Yes, there are some signs of strength in the US economy, but globally the environment is still shaky – just take a look at what is happening in Europe. As a result, I believe large-cap multinational firms will greatly appreciate over the coming years. Low interest rates are great for large companies for the simple reason that they are able to substitute debt for equity at a very low borrowing cost. IBM, for instance, used the proceeds of a 2010 bond offering (which pays a 1 percent yield) to repurchase its shares – which had a 2 percent dividend yield at the time. Others have caught on to the strategy – in 2012, American companies spent over $400 billion to buy back their own shares. In the first quarter of 2013, US companies have announced over $120 billion in new share buybacks.
Some investors are paying attention and have already decided to participate in the market rally. According to data compiled by Morningstar, globally, investors pulled some $124.7 billion dollars from equity funds in 2012, while pouring $535.2 billion into fixed income funds. That trend has started to turn around. More monies flowed into equities (mutual funds and ETFs) in the first quarter of 2013 than monies flowed into fixed income funds. Historically, tepid investors have gravitated to large companies which they are familiar and comfortable with – the Procter & Gamble, Pfizer and McDonald’s of the world.
In the view of the Gary Goldberg Financial Services Investment Committee, high-quality high dividend-paying stocks are likely to continue to be attractive investments for some time to come. Our trademarked Dividend Buster Program has a dividend yield around 5 percent, just as importantly, the risk of the portfolio (as measured by volatility) is roughly 30 percent below that of the market overall. We believe that as long as we can find opportunities to invest in high quality stocks that generate a dividend yield that is more than twice that of 5-year corporate bonds or 10-year treasuries, there is a compelling reason to invest in them.
Right now, it’s clear that large companies who are utilizing their cash to repurchase shares and raise their dividends (which are still tax advantaged), will be the longer-term winners for investors.
Christopher Hanly is an investment consultant with Gary Goldberg Financial Services in Suffern and can be reached at (845) 368-2900 ext. 247 or firstname.lastname@example.org.