Stock Market Demand is Changing, and We Like Where it’s HeadingSeptember 9th, 2019 by Tanner Wrisley
There is an interesting phenomenon occurring in financial markets today. Although the trade war with China is in-fact, interesting, this is not what I am referring to. Three different circumstances have pushed investors into sectors like utilities that have historically performed very moderately in relation to others. Last month, in a period when the S&P 500 and Dow Jones Industrials were negative, the utilities sector saw over a 5% increase. Utilities have always been a very docile sector when it comes to capital appreciation, so outperforming like this is unusual. The cause of this shift may be something more permanent than a temporary shift in investor sentiment. Due to market factors including demographics, volatility, and interest rates, high-dividend achieving sectors like utilities may be entering a period of abnormally high performance.
When buying a stock, an investor can hope for a return on investment from two areas: capital appreciation and dividends. Capital appreciation is determined by the market and is obviously very difficult to predict. Dividends are determined by a company and its board of directors. This makes them a lot more stable because companies will try to prove their strength and longevity by making consistent dividend payments. Additionally, dividends provide cash that investors can withdraw without selling shares or losing principal. For these reasons, high dividend-paying stocks are a popular choice for those in retirement looking to their investment accounts as a source of income. With the baby boomer generation reaching retirement age, the market demand for these income-producing investments has increased significantly and will continue until these demographics change.
Dividends have always been a focal point of our investing strategy at Anchor Bay. We believe companies that have an established history of paying and increasing dividends shows strength and can provide for a more reliable investment. If the market experiences a downturn, dividend-focused stocks tend to see less depreciation than their non-dividend paying counterparts. Dividends are more predictable as stated above. So when outlook on the market is bleak, investors turn to the more sure form of return in dividends which increases demand and helps the stock stave off some depreciation. Many times these companies are in more defensive sectors as well. Utility companies are usually not hurt as much by economic downturns or the business cycle because people will still use gas, electricity, and power. This only adds to the draw of investing in a utility company in times of volatility, over investing in a tech company.
Lastly, the bond market has forced investors to look elsewhere for yield. The interest rate on a 10-year treasury bond was at 1.47% on Friday as opposed to the S&P 500 yield which is well over 2%. The yields on investments like real estate investment trusts (REITs), preferred stocks, and utility stocks that we use in our portfolios tend to yield well over 5%. Many times, money managers have a certain amount of income they need to meet, and when bonds are giving off such little interest, they must move into other investments that will give off the desired level of income. With the Fed not seeming likely to raise rates any time soon, these sectors will continue to receive support.
Utilities are just one example of an area of the investment world that is seeing this increase. As previously mentioned, REITs and preferred stocks along with many other types of high-income producing investments, have benefited from the special set of circumstances that have put dividends in the spotlight. Finding securities that are primed to flourish in this dividend-seeking environment has long been a strength of ours at Anchor Bay. We continue to work hard in the dividend investment space and look forward to this continued market shift that has landed right in our wheelhouse.