LOW BOND YIELDS CONTINUE TO BENEFIT DIVIDEND-PAYING STOCKS -- TELECOM AND UTILITIES HAVE BEEN MARKET LEADERS -- DJ DIVIDEND ISHARES CONTINUE TO OUTPERFORM -- COCA COLA HITS 52-WEEK HIGH -- PHARMA HOLDERS LEAD HEALTHCARE SECTOR HIGHER
HIGH YIELDING GROUPS ARE MARKET LEADERS... With US rates at or near record lows, investors have been favoring stock groups that pay dividends in excess of bond yields. I addressed this issue on August 12 with a message headlined: "Dividend Paying Stocks Like Utilities and Telecom Do Better in a Deflationary Climate". I explained in that message that, along with bonds and gold, dividend-paying stocks do well in a deflationary environment of falling interest rates. The four groups that I listed were consumer staples, healthcare, telecom, and utilities. Most of my attention at that point was focused on telecom and utilities because of their superior performance at the time. Chart 1 compares a relative strength ratio of Telecom Holders (TTH) divided by the S&P 500 (red line) to the 10-Year T-Note Yield (green line) over the last three years. The two lines have trended in opposite directions. The chart shows that a falling bond yield (late 2008 and the spring and summer of 2010) resulted in stronger telecom performance. Chart 2 compares the relative performance of the Utility SPDR (blue line) to bond yields (green line) during 2010. Both dividend-paying groups started their stronger performance this spring just as bond yields started to tumble. [Another reason for their stronger performance is that both are defensive groups that usually do better when investors are nervous about the stock market and the economy].
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Chart 1
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Chart 2
DIVIDEND ISHARES OFFER DEFENSIVE PROTECTION ... This is the same headline that I wrote on August 17 in which I charted the DJ Select Dividend Index Fund (DVY), and explained that the DVY offered a simple way to take advantage of the dividend benefit (Chart 3). At the time, the DVY had just bounced off its (red) 200-day average and exceeded its (blue) 50-day line and was starting to turn higher. It has since neared its April high and has outperformed the broader market since April when interest rates peaked. The DVY includes a number of defensive groups that pay dividends. The two biggest groups included are utilities (28%)and consumer goods (19%). Some of the heaviest weighted stocks contributing to its latest upturn (which I showed) came from those two groups and telecom, including CenturyLink (telecom), Entergy (utilities), Clorox, Kimberly Clark, and McDonalds (consumer goods). Two additional consumer stocks that show both absolute and relative strength that are included in the DVY are Avon (Chart 4) and Coca Cola (Chart 5).
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Chart 3
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Chart 4
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Chart 5
BIG PHARMA LEADS HEALTHCARE RECOVERY ... The fourth defensive group in the dividend category is healthcare. Chart 6 compares two healthcare ETFs to the S&P 500 (flat line) since last September. The blue line is Pharm Holders (PPH) and the red line the Healthcare SPDR (XLV). Both turned up relative to the S&P 500 in April. The two lines show most of the healthcare strength coming from big pharma. That may be due to the fact that virtually all of the dividend-paying healthcare stocks included in the DVY are big pharmaceutical stocks.
Chart 6
PHARMA LEADERS ... Three of the pharma dividend leaders are shown below (in order of ascending strength). Pfizer and Merck have just reached new six-month highs (Charts 7 and 8) with rising relative strength lines. The strongest chart by far, however, belongs to Bristol Myers Squibb. The weekly bars in Chart 9 show BMY rising above its 2007 peak to reach the highest level in more than eight years. All of the stocks shown herein (and the ETFs) offer several advantages. First, they pay dividends. Secondly, they're showing both absolute and relative strength. Thirdly, they offer some defensive protection if interest rates stay low and the stock market rally falters.
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Chart 7
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Chart 8
