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For all the attention paid to the massive snap-back in riskier stocks in the past two months, a somewhat less glamorous group has quietly been reaching record valuations.
They're the companies that peddle soap, diapers and ready-to-eat food that also happen to be the market's biggest payers of dividends. Prized as ports in the storm, their runup is now neck-and-neck with virtually any equity category you can name in the Standard & Poor's 500 index, amid one of its biggest rebounds in cyclical equities on record.
Measured from the Feb. 11 bottom, dividend-paying shares have had more appreciation relative to the benchmark than any other comparable period following a correction during the seven-year bull market. As with many market anomalies, ex-hippies are playing a role, this time an aging generation of workers looking to lock in payouts for old age.
"It's the retirement of the baby boomers becoming a reality," said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6-billion (U.S.). "It's definitely valuation insensitive buyers. They either don't know or just don't care what they're buying – they're just buying dividend yield."
Weird things are happening as a result. An exchange-traded fund stuffed with defensive shares and designed for calm, the PowerShares S&P 500 Low Volatility ETF, has been more volatile than the S&P 500 over the past month, according to data from Macro Risk Advisors. The fund has seen its market capitalization soar by more than 50 per cent since September.
Whatever's happening, it's pushed dividend-paying stocks to a record price-earnings ratio, 9.4 per cent above the four-year average. The 20.4 P/E of these otherwise slow-growing companies make them look more like technology stocks, which at 19.1 times earnings are now trading at a lower valuation.
The demand for yield stocks has been enhanced by a dovish Federal Reserve. The S&P 500 Dividends Aristocrats index has gained 7.1 per cent this year and reached a record last Tuesday. The S&P 500 has posted a 2.3-per-cent gain over the same period. The iShares High Dividend ETF also reached its highest net asset value on Tuesday.
Stocks that people buy for safety are seeing valuations balloon far past historical averages. Kimberly-Clark Corp., which makes paper products such as diapers and surgical gowns, trades at a P/E of 21.5. That's 35 per cent above its 10-year average, and nearly the same valuation as Microsoft Corp. Spam-maker Hormel Food Corp. reached a near-record 31.3 at the end of March, 65 per cent above its 10-year average and 62 per cent above technology stocks in the S&P 500.
There's been a noticeable increase in retirees interested in buying ETFs that provide consistent yield, said Chuck Self, chief investment officer of iSectors LLC.
"It's one of these weird times where our equity strategy's yield is greater than the fixed-income strategy, even though we have a little high yield and emerging markets in there," Mr. Self said. "People are very concerned about rising interest rates eventually, so I think there have been people putting more into these kinds of stocks that would have gone to bonds, historically."
It's possible that safer dividend stocks might soon fall out of favour, with the Fed about as dovish as it can be, said Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors. The dividend index gained 0.4 per cent on Friday, after falling 1.1 per cent the previous day, with disappointing earnings from companies such as Coca-Cola Co. dragging the gauge down.
"The upside to this stuff is limited. There's this new theme emerging of risk, and let's get long commodities, industrials and manufacturing," Mr. Chintawongvanich said. "It feels like we're close to end of rate-sensitive stocks because the Fed has maxed out on dovishness."
Both the S&P 500 Dividends Aristocrats index and the S&P 500 fell 0.3 per cent at 9:35 a.m. in New York on Monday.
Still, dividend payers have held on longer than other defensive plays, as the broader utilities and consumer staples industries post losses. Investors are willing to pay a premium searching for yield that's absent in the bond market, said Kevin Mahn, president of Parsippany, N.J.-based Hennion & Walsh Asset Management Inc.
"If the U.S. 10-year Treasury yields 1.77 per cent, all of a sudden that telecom stock with 4.5 per cent yield looks attractive," Mr. Mahn said. "Investors are turning to high-dividend-paying equities because of the fact that the Fed appears to be dovish versus hawkish and a consistent need for investors to find yield when they can't get traditional yield."