No end to dividend bonanza, says Sterne Agee strategist

No end to dividend bonanza, says Sterne Agee strategist
Cautious investors missing out on solid returns, says Harris; corporate cash 'will continue to pile up'
JAN 26, 2012
The U.S. economy is showing real signs of strength, yet investors are still too scared to take advantage of it. That's a big mistake, according to T. Jerry Harris, market strategist with Sterne Agee Group LLC. “Since Christmas, the S&P hasn't finished a day down more than half a percent, but all the volatility that investors have seen over the past few years — and all the bad news — has left them overly cautious,” he said. Mr. Harris cites “four major clean-outs” in the stock market since the start of the financial crisis in 2008 as fodder for investors' fear. He pointed out, however, that the macro picture for equities is looking more bullish by the day. For instance, he cited today's gross domestic product data, which showed that the economy grew by 2.8% in the final three months of 2011. That compares to 1.3% at the end of 2010 and 0.4% growth during the first three months of 2011. “At some point, the [U.S.] economy starts to take on a life of its own,” he said. “Europe should be in a recession, if it's not already, and China is headed for a soft landing, which will offset Europe.” Mr. Harris points to the steady direction of net flows out of equity mutual funds and into bond funds as evidence of the general investor pessimism. But at Sterne Agee, which has $600 million under management, he is even seeing institutional investors operate out of fear. “We have institutional clients who want to be in nothing but Treasuries,” he said. What investors are missing, he said, is that stocks are undervalued, particularly with regard to the current 28% dividend payout ratio, which is well below the 50% historical average. “Corporate balance sheets are flush with cash, and that cash will continue to pile up,” he said. Overall, the S&P 500 has a dividend yield higher than the yield on the 10-year Treasury, a case seen only twice since 1947. Broken down further, 45% of the companies in the index pay a dividend greater than the yield on the 10-year Treasury, Mr. Harris said. That percentage is down from 51% at the end of September, but it still beats the previous high-water mark of 44% in 1974, he said. “We're not focused on high dividends, we're focused on dividends that will continue to grow,” he said. With that in mind, some of his favorites include Agrium Inc. Ticker:(AGU), Schlumberger NV Ticker:(SLB), Intel Corp. Ticker:(INTC), and Potash Corp. of Saskatchewan Inc. Ticker:(POT). Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

Harris: The corporate cash-back plan

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