By Ben Eisen
This year's hot dividend stocks are feeling the autumn
chill.
Utilities shares entered a ninth-straight day of declines on
Wednesday, putting them on track for their longest losing streak
since 2002. The latest moves deepen the recent slide in
income-producing investments and underscore the sharp reversals in
popular sectors as investors warily watch central banks.
The S&P Utilities sector dropped 7.3% in the eight days
through Tuesday and fell another 0.4% on Wednesday morning, cutting
its year-to-date gain to 8.6%. AES Corp. slid 9.4% during the eight
days ending Tuesday, while Exelon Corp. declined 9.5%. Utilities
aren't the only victim: Real-estate shares, which like utilities
are valued for their rising dividend payouts, dropped 4.9% in the
eight days through Tuesday and another 1.9% on Wednesday
morning.
The utilities and real-estate sectors are the worst-performing
groupings in the S&P 500 for the first two trading days of the
fourth quarter, down 3.5% and 3.4%, respectively, compared with a
0.8% fall in the broader index.
The pullback comes as some fund managers have been selling
richly valued stocks and increasing cash holdings, concerned that a
roaring rally in such stocks earlier this year had made many too
pricey.
Valuations among global high-yielding stocks were at their
highest levels in more than a decade in June, according to
BlackRock Inc.
"Trees don't grow to the sky," said Brad Neuman, client
investment strategist at Fred Alger Management Inc. "It was almost
like the market was waiting for an excuse" to send high-yielding
stocks back toward their historical valuations, he added,
suggesting that such stocks could keep falling back toward those
levels.
At the same time, the recent selling in utilities and
real-estate investment trusts has been matched and at times
exceeded by declines in gold and silver, investments that offer
holders no income. Declines in safe stocks and speculative metals
together highlight how sensitive markets have become to modest
shifts in sentiment, particularly on expectations for central-bank
stimulus plans.
Nick Clay, who manages the Dreyfus Global Equity Income Fund,
said he had to sell some of his stock holdings this year because
their valuations reached levels at which the fund's guidelines
dictate they can no longer be held. His portfolio now owns 49
stocks, making it the most concentrated since inception.
Among the holdings his fund has sold this year is Clorox Co.,
regulatory filings show. The company on Wednesday was trading at
24.71 times its earnings over the past 12 months, according to
FactSet.
The price-to-earnings ratios of high-dividend sectors have been
on the rise this year. Utilities, for example, had a 12-month
trailing price-to-earnings ratio of 22.2 as of Monday, versus 20
for the S&P, according to FactSet. At the beginning of the
year, utilities had a lower ratio than the broader market.
The selloff of recent days extends a pullback that began in the
third quarter. Utilities slid 6.7% in the June-to-September period,
the sector's worst quarterly percentage decline since the beginning
of 2009. Real estate, which was split into its own sector last
month, fell 2.9%.
It has become particularly difficult to find income in the bond
market this year, with yields on the benchmark 10-year Treasury
note hitting record lows in July. And yields fell even further in
Europe and Japan, where central banks have been experimenting with
negative-rate policies.
At the same time, many investors are becoming choosier about how
they invest in stocks after years of gains have heightened fears of
a large selloff.
That fear this year drove interest in dividend-bearing stocks,
which offer bond-like income that helps to balance the volatility
of stock prices, while still offering the potential for capital
appreciation. Broad swaths of investors piled into utilities and
other high-dividend sectors.
"You can get people performance-chasing," said Bob Landry, a
portfolio manager who looks after the dividend-stock strategy for
separately managed accounts at USAA Investments. "If they're
performance-chasing, they're in the market for the wrong
reason."
Mr. Landry said his accounts now have about 6% in cash, above
the norm of 1% to 3% he ideally keeps. He said he wants to be able
to pounce on cheaper stocks, after taking some profits by trimming
holdings such as Merck & Co. and Bemis Co.
Recently, investors have been pulling money from the Utilities
Select Sector SPDR Fund, a $7.3 billion exchange-traded fund that
tracks utility shares. Withdrawals totaled $920.4 million in the
third quarter, although the fund has still taken in more than $925
million in new money this year, according to Morningstar.
Still, rising share prices are sure to make 2016 a year to
remember for dividend investors, with returns at many
dividend-focused funds still on pace to surpass those of the
broader market.
Many investors say opportunities still abound among
high-dividend stocks, especially in sectors of the market that
aren't usually associated with dividends.
"The valuations for health care are very attractive,
particularly for pharmaceutical companies which have really juicy
yields," said Diane Jaffee, a senior portfolio manager at TCW
Group.
In particular, she said her firm has been adding to holdings of
Gilead Sciences Inc., noting its price has been hit by political
controversy over drug pricing ahead of the U.S. presidential
elections.
The stock had a price-to-earnings ratio of 6.84 on
Wednesday.
Still, she said her portfolios now have the lowest allowable
weighting on traditional high-dividend sectors such as utilities,
telecommunications and real-estate investment trusts.
Write to Ben Eisen at ben.eisen@wsj.com
(END) Dow Jones Newswires
October 05, 2016 13:06 ET (17:06 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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