THE FEDERAL Reserve’s decision not to hike interest rates may have brought renewed volatility and a stock market selloff, but it also carved out breathing room for a couple of sectors: dividend payers and housing stocks.
With 10-year Treasuries now yielding around 2.14 per cent, the 2.2 per cent dividend yield of the overall S&P 500 should appeal to income-hungry investors who are convinced interest rates will stay low for a while.
Some sectors’ yields are much higher. Telecommunication services companies are yielding 5.35 per cent, for example.
Utilities and real estate investment trusts (REITs) have gained ground since the Fed announced its decision. The S&P utility index, though down slightly on Friday, was the best-performing sector since the Fed announcement.
“We could be in a lower-for-longer environment, and ... some of the stocks that have yield components, whether it’s REITs or utilities and other dividend stocks that have sold off, maybe those will eventually find a footing here and get some flow,” said Stephen Gutch, senior portfolio manager at Federated Investors.
“They’re fairly valued for a higher-rate environment, so I think they’re attractive right now.”
Since they compete with bonds, big dividend-paying stocks have benefited in recent years from the ultra-low interest rate environment, with the S&P utility index registering a 24.3 per cent gain in 2014, the best of any S&P sector.
But this year, utilities have retreated as Treasury yields rose on the prospect of a Fed rate hike. With the Fed now holding off, the sector may fall back into favour.
"When I look at utilities that are yielding in the 4-percent range, I think they're priced for what I'd call a normal 10-year Treasury yield - call it 4 or 5 percent - because with utilities you're still going to get some earnings growth," said Josh Peters, director of equity income strategy at Morningstar. "I'd have a similar take on REITs."