While the economy is certainly sluggish, it is difficult to argue that the sentiment is as bad now as it was in the dark days of 2008. Yet despite this, the ultimate safe haven— U.S. Treasury bonds—are approaching all time highs in price and record lows in terms of yield.
10 year government debt is now sporting a paltry 1.65% yield while 30 year securities currently have rates around the 2.70% mark, figures that rival 2008 levels and are at least half of what investors saw in these notes a decade ago. Since Bernanke has pledged to drive the longer term rates lower via a continuation of Operation Twist, it seems highly likely that these low levels could be here to stay for quite some time (read 4 Rules of Dividend Investing).
Given this policy, investors have been forced to seek high dividend paying stocks for current income opportunities. Luckily for these income-starved investors, there are a host of securities that have yields above even the 30-year Treasury payout. Not only that, but these stocks offer up the potential to appreciate in value as well, something that is much more difficult to say for Treasury bonds that are trading near all-time highs.
However, the space is not without risk as many of the most popular dividend safe havens have had a rough time in the face of the weak economy. Procter & Gamble (PG - Analyst Report) and Exelon (EXC - Analyst Report), for example, both pay out yields above the 30 year treasury rate but have seen their prices fall by, respectively, 9% and 13% in year-to-date terms.
Clearly, investing for yield can still be fraught with risk, even when buying ultra-safe companies that operate in ‘safe haven’ segments of their respective industries. Still, options are limited in the bond market—unless you are willing to tread into the junk space—suggesting that for many investors, income is going to have to come from stocks for the foreseeable future.
Unfortunately, each of the main dividend segments has their own issue which could either cut payouts in the future, or at least depress stock prices in the near term (see 11 Great Dividend ETFs).
Big Pharma is facing a patent cliff, while integrated oil is fighting against low oil prices. Additionally, consumer staples are up against a slowdown in demand from emerging markets, while utilities haven’t been helped by the tepid economic recovery here in the U.S.
So, the question is, given the uncertainty and the low rate environment, where do investors go for yield?
Personally, I am intrigued by the MLP segment, American Capital Agency Corp (AGNC - Analyst Report), and some high quality names in the international ETF space such as the Global X SuperDividend ETF (SDIV - ETF report) and the EG Shares Low Volatility Emerging Market Dividend ETF (HILO - ETF report). These securities all have outsized yields and can be more immune to economic shocks thanks to either their diversified holdings, or the stable payouts inherent in their businesses (read Invest Like The One Percent With These Three ETFs).
What about you? What is your favorite dividend stock/fund on the market today?
Let us know what you think in the comments below!
Author is long EXC