Rate cut expectations have been inching higher. What does the bond market’s message send to investors? asks income expert Bryan Perry, editor of Cash Machine.
I think it indicates that the U.S. economy will grow, but at a slower pace with allocation of more capital to defensive blue-chip stocks paying high-dividend yields and to stocks that raise their dividends aggressively.
Under this scenario, capital flows into both these areas of the market likely will be very bullish. Capital flows into utilities, REITs and consumer staples is very strong, since they offer higher yields and an attractive alternative to bonds.
One can throw a dart at the utility sector and hit a winning stock. The Utilities Select Sector SPDR ETF (XLU) trades at new all-time high against a tough market landscape.
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The “who’s who” of power companies occupies the top positions in the fund that, even at its new lofty level, pays a dividend yield of 3.01%. Top holdings include NextEra Energy (NEE), Duke Energy (DUK), Dominion Energy (D), Southern Co. (SO) and Excelon (EXC).
The consumer staples sector is considerably more selective in which stocks are outperforming.
Leading the pack are Procter & Gamble (PG), Kimberly-Clark (KMB), PepsiCo Inc. (PEP), Nestle S.A. (NSRGY), Colgate Palmolive (CL) and Mondelez International (MDLZ). These front-running consumer staples stocks are all paying yields as high as 3% even after the recent run up.
The Vanguard Real Estate ETF (VNQ) pays an attractive 3.9% dividend yield, even at its recent high of $88, with top holdings in American Tower (AMT), Simon Property Group (SPG), Crown Castle International (CCI), Prologis Inc. (PLD), Equinix Inc. (EQIX) and Public Storage (PSA).
What a nice mix of holdings — cell towers, mixed-use commercial property, logistics warehousing, data centers and self-storage.
So, while 56% of the S&P 500 stocks are now in bearish technical patterns, there is a bull market in utilities, REITs and consumer staples taking place in the wake of the handwringing about a trade war with China.
While the global investing world tries to anticipate when a break in the trade war will stoke a new rally, there is already one in full swing within some of the most boring businesses in the world. And that’s perfectly fine when those boring businesses are generating profits hand-over-fist.
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