Slides of the Month – April 2014

Experience Insight Impact

biegelwaller.com

Overview: Dividends are a significant driver of long-term equity returns and possess many benefits, including enhanced total return and favorable tax treatment. However, in our view not all dividend stocks are priced attractively. In today’s low-rate environment, investors have bid up valuations in the traditional “defensive” dividend payers – for example Utility stocks. We see better value in more cyclically oriented stocks, which are positioned to benefit from further economic growth.

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Experience Insight Impact

The Benefits of Dividends

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Dividend Yielding Equities:

• The reliability of dividends helps protect the downside and can position a “floor” on the prices of dividend paying equities.

• Dividends are typically associated with companies that exercise discipline allocating capital.

• Dividends have provided 45% of S&P 500 returns since the Great Depression.

• Most dividends are tax-advantaged.

Experience Insight Impact

The Power of Dividend Reinvestment

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To illustrate the power of long-term dividend reinvestment, we highlight the following example: $100 invested on 12/30/88 in the S&P 500 would be worth $677 as of 4/1/14. Accounting for dividend reinvestment that amount would grow to $1,172. This total return is 73% higher than the price only return.

Experience Insight Impact

Not All Dividend Yields are Created Equally

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• After several years of very low interest rates, investors continue

to search for yield.

• Accordingly, sectors with traditionally high dividend yields have been bid higher and now trade at relatively expensive valuations given the lower-than-average growth prospects.

Investors should be cautious about stretching for yield at all costs, in particular sacrificing earnings growth.

Experience Insight Impact

Defensive Sector Earnings Growth is Well Below S&P 500 Peers

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Defensive, yield oriented sectors – Utilities, for example – are experiencing below market earnings growth (4.57% vs. 8.68% for all S&P sectors).

Experience Insight Impact

Defensive Dividend Payers are Among the Most Expensive Sectors

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The PEG ratio is a stock’s price earnings multiple divided by the growth rate of its earnings. The higher the PEG ratio, the more costly a company’s growth. On this valuation metric, the Utility sector looks the most expensive with a median PEG ratio of 2.76x vs. the overall S&P 500 at 1.53x. This compares to more cyclically positioned sectors including Financials, Materials, and Information Technology trading at or below the overall averages.

Investors are paying up for yield.

Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy.

Experience Insight Impact

Disclaimer

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