Bill Gross, the one-time bond-market king, is back in the news, advising investors to spurn bonds at today’s dismally low yields and load up on “high-yielding, secure-dividend” stocks instead.
It’s a tempting theory. But people should be cautious about betting too much on Mr. Gross’s advice.
Many of those high-yielding, secure-dividend stocks have already soared in price. Anyone who buys them now is paying a hefty amount for whatever security they offer.
Investors should also remember that dividend stocks are not a surefire refuge. Consider the iShares S&P/TSX Canadian Dividend Aristocrats ETF. It performed better than the broad market during the financial crisis, but lagged slightly behind the market during the plunge in the final quarter of 2018.
Granted, dividends have their appeal, especially in a world where nearly US$14-trillion of bonds are now paying a negative yield, ensuring a certain loss to anyone who holds them to maturity. The strongest part of Mr. Gross’s investment outlook is his argument that we are nearing the end of what central banks can accomplish by pulling rates lower.
“In the absence of substantial fiscal stimulation, the economic and asset boost from negative interest rate yields may have reached an end,” Mr. Gross writes in a post on his new website, williamhgross.com.
The 75-year-old billionaire co-founded Pacific Investment Management Inc. (Pimco) in 1971 and built the Newport Beach, Calif., company into a bond-market powerhouse before clashing with colleagues and being pushed out in 2014. He then managed money at Janus Henderson Group, with generally unimpressive results. He announced his retirement earlier this year.
Despite his rocky recent past, Mr. Gross still sounds much the same as always. He was renowned during his Pimco career for writing commentaries that combined bond market geekery with pop-culture references. His latest note refers to Saved by Zero, a 1983 hit by the British band The Fixx. His conclusion: Markets were saved by zero rates in the aftermath of the financial crisis, but that fix – as well as The Fixx – are well past their stale date.
Lots of people would agree. On Tuesday, the International Monetary Fund slashed its outlook for global economic growth to a mere 3 per cent in 2019, the slowest rate of expansion since the financial crisis.
Many economists are urging a return to fiscal stimulation – deficit spending, in other words – to goose lacklustre growth. Some advocate radical alternatives, such as “helicopter money” programs, in which central banks would create money and dispense it directly to consumers.
How should an investor navigate this environment? Mr. Gross’s advice is to prepare for lower returns and place your money accordingly. “High-yielding, secure-dividend stocks are what an astute investor should begin to own,” he writes.
This is sensible advice, but comes rather late in the day. Many reliable, recession-proof dividend payers – utilities, discount retailers and the like – have already surged this year. In the U.S., Walmart Inc. stock has returned 28 per cent since January. In Canada, Fortis Inc., the power producer, has generated 21-per-cent gains. At this point, it is difficult to see these or similar stocks as bargains.
Even tiny flickers in interest rates could have a major impact on future returns. Mr. Gross says he estimates that stock prices have risen 15 per cent this year simply because of an 80-basis-point decline in 10-year Treasury rates. (A basis point is one 100th of a percentage point.)
The difficulty for investors is that this math works in both directions. If a small fall in bond yields can raise the price of stocks by double-digit amounts, a small rise in bond yields could wipe out that gain just as quickly.
If the market does hit a bad patch, it is difficult to predict how dividend stocks will perform. A recent analysis by money manager WisdomTree Investments Inc. shows its large-cap U.S. dividend fund held up better than the overall market during six of 10 double-digit declines in the S&P 500 since 2007. However, it lagged behind the market in the other four downturns.
Buying dividend stocks can still make sense. But investors shouldn’t see them as an infallible refuge against today’s uncertainties.
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