The Lato Letter: Volume 1, Issue 16.

The Lato Letter: Volume 1, Issue 16.

David Milstead had a very interesting article in today’s Report on Business comparing yields on US large cap stocks to the 1.5% yield on US 10-year Treasury bonds.

The article discusses the fact that 307 of the 500 stocks in the S&P 500 have yields greater than that benchmark bond.  In these turbulent markets, knowing that you hold a solid business that pays a yield greater than a 10-year fixed income investment provides some degree of comfort.  In most clients’ portfolios, I hold a basket of 12 US large cap stocks.  The average yield of those stocks, including the three stocks that don’t pay dividends, is 1.8% and eight of the twelve have yields higher than that US Treasury bond.

Obviously, the yields have not prevented those stocks from declining in value during the market decline of the last two months.  The newsflow has been decidedly negative of late with continued problems in Europe and weaker than expected economic numbers in China and the US.  Quite frankly, I do not see an upcoming catalyst that will reverse the negative newsflow but I also do not feel that it is wise to move money from stocks to bonds given the relative yields.

I expect that we may continue to see choppy markets throughout the summer but the following things should mitigate a significant decline from current levels: relative valuations and yields, which are even more favourable than they were a year ago, a stronger North American financial system, slow but steady improvements in the US auto and housing markets, easing inflation pressures, and the abundance of personal, institutional and corporate cash.  In the interim, as mentioned earlier, investors can remain comforted by the dividend flows that are available to them.

Dividend yields on US stocks are a common news feature these days and as such, I will be appearing on the Top One segment of BNN’s Headline with Howard Green tomorrow (Wednesday, June 6th) at 1pm with the two other portfolio managers and me choosing our top pick from US dividend paying stocks.

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