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Looking For Yield? This Is The Definitive Presentation For You

Courtesy of Tyler Durden

In what can be dubbed the definitive presentation for those pursuing yield (and let’s face it, in our day and age when most have given up on stocks as a capital appreciation vehicle, that would be everyone), Morgan Stanley’s Jim Caron and team have created “Searching for Yield – What the Bond market is up against.” Easily the most comprehensive analysis of even the smallest nuances in rates, corporates and dividend yields, it is chock full of 113 pages of must read data. And while we leave it up to the reader to make their own conclusions on which asset class is most appropriate, it bears to highlight Caron’s thoughts on why stock dividend yields are surging, despite Cramer’s daily begging to get people invested into companies that may pull their dividend any moment, to go with the whole cash hoarding theme.

Why Are Div. Yields Rising vs. Bond Yields

1. Possibility of a structural de-rating of stocks

2. An outlook for weak long-term earnings growth and reduced possibility of P/E expansion, meaning that div. yields are a more dominant part of total returns

3. Higher equity risk premium. We estimate the ERP is ~5.2% vs. an avg. of 3.5% since 1990, thus a higher div. yield is required.

4. Investors doubt companies can reinvest earnings to create value, thus return money back to investors.

5. Rising div. yields can be interpreted in two ways:

i) risk premiums have permanently risen (4%-5%) and dividend yields thus need to rise, or

ii) long-term earnings growth has shifted down, implying expectations of low GDP growth and even weaker earning growth. Thus div. yields need to rise in order to compensate in total returns.

If inflation continues to fall and real bond yields rise, the div. yield gap narrows. Only if this persists do we worry about a permanent shift in equity valuations. Rising dividend yields is a valuation measure that may support stock prices.

In other words, surging dividend yields is not an indication that dividend stocks are cheap: on the contrary! It indicates an increasing loss of confidence in equity as an asset class. Buyer better beware… and definitely not listen to Cramer.

Full presentation:

 


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