Much has been made of the 'terrible-taper' losses [4] that bondholders face (and have supposedly suffered in May) as the reason for the great rotation myth to rise phoenix-like from the flames of all-time-low yields. Talking-head after talking-head appears to make the same sheep-like thesis of buying dividend-paying stocks - being "paid-to-wait", why earn low Treasury yields when stocks offer more? Well the answer, though obscured from view to most, came in May. As we have noted over and over again (most recently here [5] and here [6]), the difference between bond (yields) and equity (dividends) are risk, drawdown, and uncertainty. It should be obvious - but with such a strong anchoring bias for stocks, sadly it is not. By way of example, the 4% dividend-paying Dow Jones Utility Index fell over 10% in May (losing 2.5 years worth of dividends) while the 2.3% yielding 10Y Treasury fell 2.5% in price. As we noted before, there is a reason boomers prefer bonds.
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So - it would appear that dividend-paying equities are nothing but a high-beta play on rates - if you seek safe yield, high-beta capital loss does not seem like the appropriate strategy... though of course - blinded by the last few months, managers can only see the upside to stocks... being paid to wait (to lose more capital possibly) seems wrong-headed when put in context of return and drawdown potential. But none of that matters...
Pile up on stocks with dividends (from a week ago...)
Cramer -
"most people don't realize the importance of dividends. They think they're boring, for senior citizens, retirees only.
...
all the reasons that make dividend stocks worth owning become even more compelling in a down market.
That's when they really, really give you that cushion...
because as their share prices go lower, their yields go higher - making them more attractive to other investors who don't own them yet and giving you a better return for just owning the darn things.
You can buy stocks with bountiful dividends safely on the way down. I can't emphasize enough how important that fact is in a horrible market."
Somewhat stunned by this advice:
1) doesn't seem like the cushion was so great (doubling the loss of the market)
2) as share prices drop - for economic reasons? - so the firm is likely to cut the dividend!!
3) high dividend-paying stocks are 'high' for a reason in general (just as high-yield credit is high for a reason)
4) simply put, a dividend is not sacrasanct; a bond coupon is.
Also - do not forget that balanced funds, major pension managers, and any relatively conservative fund will have a weighting in their holdings between bonds and stocks and when a month like May comes along, the 'bond portion' will have become more under-weighted and actually, to rebalance to the mandated allocations, the rotation is from equities (which outperformed) to bonds...
So which one would you rather own here?
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