Blue-chip equities are less attractive than bonds thanks to plunging dividends, according to analysis published today by Bloomberg.
U.S. stocks have returned an average of 6% a year since 1900, reported the London Business School and Zurich, Switzerland-based Credit Suisse Group AG.
But without dividends, equities gained only 1.7% per year, compared with 2.1% for long-term Treasury bonds.
In the last quarter, 288 companies in the Standard & Poor’s 500 stock index either cut or suspended dividends. The S&P 500 is trading at the lowest price to earnings since 1985, the report said. When accounting for slashed dividends, however, shares are overvalued by as much as 46%.
But advisers aren’t giving up on blue chips.
Cutting dividends could be the right thing to do for the shareholders, said Jeff Bernier, chief executive with TandemGrowth Financial Advisors LLC of Alpharetta, Ga., which has $55 million in assets under management
“Companies need to protect the safety of the balance sheet,” he said. “Over the next 20 years, I think there is an equity risk premium. I think you do get paid more by being inequities than being in bonds.”
Stocks could still get cheaper, but diversification is important for the long-term investor, Mr. Bernier said.
“The S&P 500 is not cheap,” said Dan Traub, president of Tempo Financial Advisors LLC of Natick, Mass., which has $20 million in assets under management. “But you would say it’s too expensive if you are convinced that earnings are going to fall off the table going forward.”
Long-term investors shouldn’t throw in the towel on equities, Mr. Traub said.
“You cannot rely on just one indicator,” he said. “If a company doesn’t pay dividends, does that mean they are a bad company and you don’t want to own them? Not necessarily.”