Yearning for Yield


Yearning for Yield


JULY 03, 2019

The S&P 500 Index hit at an all-time high entering into May 2019; however, just three days into the month, investor resolve was tested by an increase in US-China trade tariffs and an escalation of geopolitical tensions. May proved to be a bruising month for global equities as all major indexes declined by more than 6%. It was, in fact, the worst May for equity indexes in the last ten years. Additionally, a fresh scramble for US government debt drove the US 10-year Treasury yield back below 2% in late June, a sharp decline from the 3.2% high reached in early November 2018.

Many investors and economists had assumed that the Trump administration’s tax cuts and looser regulation would spur stronger growth and higher inflation and, in turn, higher interest rates. The opposite has played out this year. The falling 10-year yield indicates softer economic growth prospects. The latest yield drop followed the US Federal Reserve’s decision to keep its benchmark interest rate unchanged and potentially cut it in the near future. Investors are now expecting yields are going to be lower for longer, in addition to an extended period of low to moderating growth.

Yield on the US 10-Year Treasury Note

Source: Bloomberg. November 7, 2018 through June 20, 2019.

As bond yields have fallen and growth prospects have softened, stocks with steady dividend payouts and lower volatility profiles have become increasingly attractive. S&P 500 sectors perceived as defensive have been outperforming the broader market since mid-May. The Fed’s dovish tilt has provided a particular boost to Real Estate stocks that had previously been pressured by the threat of higher rates. Real Estate stocks in the S&P 500 have advanced over 24% in 2019, outpacing the S&P 500’s 18% rise after the sector fell 2% last year1

Circle size reflects total market value

Source: Bloomberg, S&P 500 Index based on GICS sector classifications. May 1, 2019 through June 19, 2019. Green indicates defensive sectors, purple indicates sectors typically depicted as cyclical.

The 10-year yield is well below the approximately 3% dividend yield offered by the highest dividend paying stocks in the S&P 500, Utilities, Consumer Staples and Real Estate stocks, exceeding the broader S&P 500’s roughly 2% yield.


Source: Bloomberg as of June 19, 2019. Sector yields are based on trailing 12-month dividends. Sector classification based on GICS.

At this point in the market cycle, transitioning a portion of an investor’s fixed income or growth equity portfolio into defensive equity income remains compelling. Defensive equity income provides investors with an attractive source of dividends which play an increasingly integral role during low equity return environments as these typically become a larger and more stable component of total return. Additionally, defensively oriented stocks help to reduce overall portfolio beta to help weather the anticipated lower for longer interest rate and moderated growth environment, while continuing to allow for equity market participation.

1 Based on Total Return sourced from Bloomberg from May 1, 2019 through June 19, 2019.

This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.

The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.

QSCR-18809 (July 2019)

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