There’s increasing reason to believe that the Treasury market has stabilized on the fundamentals—until the next panic when the Federal Reserve again begins to talk as if a decision to taper off its program of buying $85 billion a month in Treasuries and mortgage-backed assets is just around the corner.
And if the Treasury market has stabilized, it means that the weakness in dividend stocks (calling it a sell off would be an overstatement) is at an end—for a while—too.
The latest piece of evidence comes from a Wall Street formula called the term premium, which measures the risk of holding long-term bonds by factoring in the market’s outlooks on inflation and economic growth.
If you assume that consumer inflation will continue for the rest of 2013 at something like the current low rate–the lowest rate since 2009; and if you assume that U.S. economic growth will stumble ahead for the rest of 2013 by something like 2% or so rather than “racing” ahead at 3%, then the current 10-year Treasury yield of 2.54% is about right.
The long-term reading on the term premium has been an average reading of 0.40% in the decade before the financial crisis in 2007. It’s now at 0.46%, according to Bloomberg. As recently as May 2013 the term premium was a negative 0.5%. The term premium has been in negative territory since October 2011 and turned positive only in June 2013.
What does all that mean? The term premium is the extra yield that investors require before they will buy a long-term bond instead of a series of short-term bonds. If, for example, the yield on a 10-year Treasury were 5.5% and holding a series of 1-year Treasury bills over the next 10 years would be expected to yield 5%, then the term premium would be 0.5 percentage points or 50 basis points.
In most periods you’d expect the term premium to be positive since investors would, normally, require extra yield to induce them to hold a longer-term bond. But under some circumstances the term premium would be negative. If, for example, investors wanted to lock in a long term yield instead of taking on the risk of rolling over shorter term bills—with the chance that interest rates might be lower on each subsequent roll over—then the term premium could well be negative. That is indeed why the term premium was negative in early 2013—bond buyers actually preferred locking up their money for the long term instead of taking the risk that short-term interest rates might fall for subsequent rollovers. It wasn’t necessarily that yields on 10-year Treasuries were so attractive in comparison to short-term yields. It’s just that they were preferable given the assumed unpredictability in short-term yields. Predictability is a valuable commodity for pension funds and insurance companies that want to match the timing of their cash outflows and the timing of their cash inflows.
The big reason that bond buyers have started to see 10-year Treasury bonds as fundamentally attractive again—aside from their big recent drop in price and rise in yields—is the absence of any signs of inflation. Look around the globe—can’t find it. Can’t even find a scenario that might produce it relatively soon. At current economic growth rates, the global economy is awash in capacity whether it’s capacity for manufactured goods or production capacity for commodities. With China’s economy slowing that global overcapacity doesn’t look likely to go away quickly. (The one exception to this pattern of modest inflation is, perhaps, food commodities but even there the potential for a record harvest this year has pushed down near-term prices.)
Real yield on the 10-year Treasury—that is the yield once you subtract current inflation—is 1.56 percentage points, the highest level since March 2011. As recently as November, real yields were negative.
This hasn’t been a great first half for Treasuries and other bonds. Treasuries, according to the Bank of America Merrill Lynch bond index, lost 2.48% in the first half of 2013, the biggest loss since 2009
But Wall Street now believes that bond prices have stabilized within a likely range for the 10-year Treasury of 2.4% to 2.8% for the rest of 2013. High levels of bond market volatility and the uncertainty over when the Fed might begin The Taper argue that bonds yields aren’t going back to former lows, however.
What does this mean to you? Read more
This is a tough one and I’d bet that many of you would disagree no matter what I decided.
The name in question is Magellan Midstream Partners (MMP), a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
This master limited partnership has been a very, very good addition to the portfolio. At the time of the initial buy, these units paid a 7.3% distribution. Since I added the units to the portfolio on December 6, 2005, they’ve gained 60.3% (to the close on June 7, 2013.)
And that’s the problem.
The partnership has increased distributions every year. From $1.45 in 2010 to $1.56 in 2011 to $1.78 in 2012, but the increases in distributions haven’t kept up with the increase—27.4% in 2011 and 30.6% in 2012, for example, in the price of the units.
Consequently, the yield on this holding has come down every year—from 6.55% in 2009 to 5.15% in 2010 to 4.52% in 2011 to 4.13% in 2012 to 3.9% right now.
Why is that an issue? Because that falling yield is a sign that dividend stocks have gotten too popular. Especially recently. Read more
Everybody is on the hunt for higher yields. With a 3-month Treasury bill yielding 0.03%, way less than the rate of inflation, and a 10-year Treasury yielding just 2.04%, barely more than inflation, who can blame them. And too many investors seem willing to add lots of risk in their hunt for yield—10 years is a long time to lock up your money in even something as safe as a Treasury note if interest rates or inflation go up. Buying a corporate junk bond might get you 5% or 6%, but these are the riskiest corporate debt out there. If the economy stumbles, junk bonds will tumble.
If you’re looking for higher yield and you don’t want to sacrifice safety, I think you’re best bet is to look for dividend stocks from solid companies. The payouts from a dividend stock go up over time—unlike the fixed payouts from a bond—giving you protection if interest rated rise. And if you pick a company with a solid and growing cash flow from its business, you’re taking on much less risk than you would with a junk bond.
Best of all, if you dig real hard you can find stocks paying dividends of 3%, 4%, 5%, and even, occasionally 6%.
In this market, of course, even with lower risk dividend-paying stocks you can’t just buy and forget. These days being a dividend investor means paying attention to when a stock gets over value and when it’s a buy on a stumble.
What follows is a list of 10 dividend—U.S.-traded stocks only on today’s this list–stocks that at this moment best combine payout and safety. I’ll be adding some of these to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ today. Some of these are already members of that portfolio. In that portfolio you can also find some non-U.S.-traded dividend stocks. Read more
Way back on March 12, I promised http://jubakpicks.com/2013/03/12/all-time-high-for-u-s-stocks-hooray-but-why-should-we-care/ that I was going to add a stock to my dividend income portfolio soon (on March 13, I said.) Well, I didn’t make the add then and I’ve been waiting for the predictable volatility of this market to give me a better entry price. I got that price today and I’m finally making my add to that portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
I’m going to take advantage of today’s 1.6% drop to recommend buying shares of Italian oil company Eni (E in New York.) It’s not surprising that shares of Eni are down today—the Milan exchange FTSE MIB index closed down 2.5% today in reaction to the Cyprus “solution.”
But today’s drop brings the total decline since the January 17, 2013 high to 10.9% and it pushes the dividend yield close to my 5% dividend income buying target. (The yield is 4.95% on March 25 based on the paid September 2012 dividend and the declared May 20, 2013 dividend.)
And I think you might even get some growth out of this oil stock. Read more
I don’t think it’s wise—or profitable—to ever underestimate Intel’s (INTC) patience. Recent product announcements and news on design wins show that the company continues its long-term attack on markets where Wall Street seems to have concluded that Intel can never win. (Intel is a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ It pays a 4.2% dividend.)
“Never” is a long, long time.
First, Intel announced a slight upgrade on its Atom chip—the Z2580–at February’s Barcelona Mobile World Congress and that was almost immediately followed by news that China’s ZTE, the fourth biggest seller of mobile phones in the world, has decided to use it in some of its new phones. This is an important follow up to Intel’s win with the Motorola Razr I phone last year. Intel still doesn’t have a central position in mobile phone silicon but it is no longer completely locked out of that market and the company even has some momentum. The Atom Z2580 does look like it has closed some of the graphics gap with chips from ARM Holdings (ARM.LN in London and ARMH in New York.)
Second, Intel has beaten out Taiwan Semiconductor Manufacturing (TSM), the largest independent chip foundry in the world, to build chips for Altera (ALTR), a leader in field programmable gate array technology. Read more