I had this published at Seeking Alpha's instblog, which means I can publish it anywhere else. Posted at Morganist Economics. I had this published at Seeking Alpha. Money Migration - Low Fed Interest Rates Could Push Share Prices Of High Dividend Paying Companies Up. Peter Morgan. Nov. 25, 2019 4:39 PM ET Summary - Low Base Rate Interest Negative Against Inflation. - Greater Returns From Corporate Bonds And High Dividend Paying Shares. - Dipping Economic Growth Indicates Long Term Low Interest Rates. - Reviewed Companies (KO), (INTC), (JNJ), (WFC), (RIO) and (INFY). Investment Thesis: The fall in economic growth seen in America is a sign of lower Federal Reserve interest rates in the future. The Central Bank uses reductions in the cost of borrowing to stimulate growth within the economy suggesting the rate will remain low until Gross Domestic Product or Inflation rise. Investors may look for saving products with higher returns, one option is share dividend yields. The greater demand for high dividend paying shares strengthens share prices. Background Evaluation: The current return of the Federal Reserve's base rate is 1.5% - 1.75%, which is negative at 0.3% - 0.05% after the current 1.8% rate of inflation has been deducted. A need to receive a positive return against inflation from saving products could lead to an increased interest in other investments, such as corporate bonds and shares with high dividend yields. The question is, which products will fund managers be looking for to get the returns they really want? It depends on what they want from the investment, some fund managers will be searching for secure fixed payment returns. In this case they will be looking to put their money into corporate bonds. Companies with high rates of interest that have a positive asset value over their liabilities, it guarantees the principal is repaid if the corporation enters administration. If regular fixed payments are not required high dividend paying shares are a great option to beat inflation. The dividend yield is calculated as a percentage of the share price, so it is necessary to find companies with stable and appreciating share values. By assessing the share price of the many corporations paying dividends and how generous the annual yield is it can be determined which companies are likely to be invested in during this negative base rate return period. This is the process of predicting movements in money made to maximise low risk return. Alternative Investment Opportunities: What makes money move? Investors are looking for the highest returns or the safest investment or a combination of both. I have anticipated there will be a movement into high dividend yield and high bond yield paying companies. I will therefore assess the following corporations Coca-Cola, Intel, Johnson & Johnson, Wells Fargo, Rio Tinto and Infosys due to their high dividend yields, which I believe make them attractive investments when interest rates are low. I will be looking for the consistency of share values to make sure the dividend payments, which are usually a percentage of the share price, are constantly appreciating. In terms of corporate bond yield payments I will be looking for a combination of the amount paid and the security of the investment. By making sure the company has a greater asset value than liabilities on its balance sheet risk can be reduced from bond defaults, due to priority payouts in insolvency. Data Analysis: Coca-Cola: Courtesy of Seeking Alpha 20/11/2019. Coca-Cola pays a 3.01% annual dividend yield, which is greater than the current rate of inflation by 1.21%. The current share price is $53.20, which is near to its recent all time high. The graph demonstrates peaks and troughs in the share value although there is an overall long term appreciation in share price. There is some risk the share price could fall depreciating the value of the assets owned by the investor reducing the return dividend payments generate. According to the Coca-Cola corporation's annual report (in 2018) the total debt as a percentage of total assets is 77.1%. The annual corporate bond yield is 2.22%, which beats inflation by 0.42%. This secure fixed income payment is now more attractive to long term risk averse investors, searching for an above inflation return that has capital protection against any loss from default. The returns indicate a possible money migration into Coca-Cola by fund managers. Intel: Courtesy of Seeking Alpha 21/11/2019. Intel pays a 2.18% annual dividend yield, which is greater than the current rate of inflation by 0.38%. The current share price is $58.05 and has risen steadily since the financial crisis of 2007 - 2009. There is some risk the share value has peaked and could fall dramatically, reducing the dividend payment. The share price has peaked and dropped in value before falling by $90 billion, which was recorded as the biggest decline in market cap for the year 2000. The corporate bonds may be a safer way to invest in the company and get an above inflation return. The current bond yield for Intel is 1.88%, which beats inflation by 0.08% providing a positive return against the loss of purchasing power from currency devaluation. According to Intel's annual report (in 2018) the total liabilities as a percentage of total assets is 41.40%. This makes their corporate bonds very secure against the potential risk of repayment default. Johnson & Johnson: Courtesy of Seeking Alpha 21/11/2019. Johnson & Johnson pay an annual dividend yield of 2.80%, which is greater than the current rate of inflation by 1.0%. The current share price is $136.10 and has appreciated in value steadily throughout the period recorded in the graph, without any dramatic depreciations in value. There are smaller peaks and troughs in the short term share price, although the quarterly dividend payments make holding on to undervalued shares a worthwhile waiting game. According to Johnson & Johnson's annual report (in 2018) the total debt as a percentage of total assets is 60.93%. The annual corporate bond yield is 2.17%, which beats inflation by 0.37%. This secure fixed income payment is attractive to investors who want to get a safe return that is greater than inflation. There is security from the high asset ownership in relation to debt, which insures the investor will be repaid if the company enters administration. Wells Fargo: Courtesy of Seeking Alpha 22/11/2019. Wells Fargo pays an annual dividend yield of 3.81%, which is greater than the current rate of inflation by 2.01%. The current share price is $54.05 and has increased in value progressively since the financial crisis of 2007 - 2009. Apart from the depreciation in share value that occurred during the financial crisis the share price seems stable with small fluctuations. The annual dividend yield compensates for short term share price drops that could unexpectedly arise. According to the financial data in Wells Fargo's annual report (in 2018) the total debt as a percentage of total assets is 88.43%. The annual corporate bond yield is 2.22%, which beats inflation by 0.42%. Although the debt is high the total assets of the company outweigh the total debt making corporate bonds more secure. This secure fixed income payment is greater than inflation so it is attractive for investors looking for returns over currency depreciation. Rio Tinto: Courtesy of Seeking Alpha 22/11/2019. Rio Tinto pays an annual dividend yield of 6.21%, which is greater than the current rate of inflation by 4.41%. The current share price is $53.80, which is far below the company's peak value of $125.57 in June of 2008. The company was hit badly by the financial crisis a decade ago and although there has been some recovery from the drop to $21.24 seen in January 2009 the share price has been volatile since, indicating dividend payments may fall in value terms. According to Rio Tinto's annual report (in 2018) the total debt as a percentage of total assets is 51.97%. The annual corporate bond yield is 2.68%, which is greater than inflation by 0.88%. The corporate bonds seem very secure due to the low level of debt as a percentage of assets. If the company was to enter administration the principal investment of the corporate bond is likely to be repaid, which may appeal to investors seeking a secure above inflation return. Infosys: Courtesy of Seeking Alpha 23/11/2019. Infosys pays an annual dividend yield of 2.74%, which is greater than the current rate of inflation by 0.94%. The current share price is $9.60, which is not far off its peak of $12.08 earlier in this year. The share price has collapsed by over 30% of its value a number of times in the last two decades with the biggest drop in value occurring in 2000 - 2001. Although the dividend yield is good the share price may fall reducing the payment received by an investor. According to Infosys's annual report (in 2019) the corporation has very little debt, if any, which means there are no corporate bonds available to purchase. The low level of debt described in the annual report's balance sheet as loans are minimal. If the company was to enter administration the share holders are protected against the loss of investment. The share price is currently following a downward trend indicating a further fall, but the performance data is good. Assessment Review: All of the corporations reviewed in the assessment provide returns greater than the current rate of inflation. Assuming the rates of return are assured by the corporations that pay them they are better investments than the current base rate of interest set by the Federal Reserve. If the current rate of inflation remains constant it is likely there will be a money migration into the reviewed companies, which is likely to push their share prices and dividend payouts up. Some of the corporations reviewed pay higher dividend yields and bond yields than others. Many of the corporations are more secure against various risks than others. The biggest risk is the volatility of the share price, which can go up or down. The charts of Infosys, Rio Tinto, Wells Fargo, Coca-Cola and Intel are evidence of previous share price volatility and unstable dividend yields. Johnson & Johnson's share price is less volatile paying a stable dividend yield. If investors are looking for a more secure fixed return the corporate bonds paid by the companies might be better. The figures for corporate bond yields are pretty good with all of the companies reviewed paying above inflation returns. The money movement will most likely migrate to the most secure bonds, which offer a higher return. Rio Tinto's corporate bonds look like the most appealing with a 0.88% above inflation return and low corporate debt. Macroeconomic Outlook: With inflation higher than the currently paid base rate of interest set by the Federal Reserve, it is likely there will be a shift of monetary assets to secure investments that pay a higher return than the level of currency depreciation. However if the rate of inflation falls or the interest rate rises this dynamic will stop. The question is will inflation fall or interest rates rise? Inflation is harder to predict, due to there being so many factors that impact aggregate prices. Although the rate of inflation has been hovering around 2% for the last four years there is no guarantee that it will stay that way, it could fall. However the current rate of inflation is historically low, which indicates it is more likely to increase in the future than fall. The other problem with inflation is that if it increases too much, it will make the corporate bond and share dividend yields of the assessed companies negative against the depreciation in currency value. There is only so much inflation can rise before the higher return investments the assessed corporations offer give a negative return too. This could stop the movement away from base rate paying products. It is however most likely the movement will continue as a result of fund managers trying to reduce losses caused by higher inflation, a 1% loss from inflation is better than a 2% loss from inflation. The other question is will the Federal Reserve interest rate rise? The Federal Reserve uses the base interest rate to stimulate economic growth within an economy. It reduces the cost of borrowing by cutting the interest rate. President Donald Trump has set an annual 3% economic growth target rate, which will require a lower rate of interest to be achieved. Although there are other mechanisms used to enable economic growth the interest rate is the tool primarily applied in America indicating the rate will remain low for a while. Conclusion: After an assessment of the current rate of inflation and economic growth rate in America, it is possible to conclude it is highly likely there will be a monetary migration from base rate paying investments to more secure higher return paying investments. The reviewed corporations of Coca-Cola, Intel, Johnson & Johnson, Wells Fargo, Rio Tinto and Infosys are prime examples of companies fund managers will be interested in moving their investment portfolios into. Corporate bonds are more stable than shares, assuming the total assets a company owns out value the total liabilities it owes. Fund managers will be searching for the highest returns paid for by corporate bonds and companies that have positive total asset values after their liabilities have been deducted. Companies that have a steady share price and dividend yield will also become attractive, but a movement into high yield corporate bonds is far more likely. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
no no no. Do not buy bonds nor div stocks. You think pension funds have chased bond yields to insanity low but have left div stocks untouched? There is no free lunch here. Actually div stocks are the worst for this exact reason. Div is irrelevant anyway. Buy back is the name of the game. Has been for a long time. QQQ is the only play here.
There is a reason pension funds will look for corporate bonds fixed repayments. It is due to the need to get a fixed income payment at the maturity date to be able to purchase an annuity. If the stock or market is down then it will reduce the pension pot at the maturity date so switching to corporate bonds prevents low accrued savings at the annuity purchase date. The other side of it is the need for annuity providers to get a guaranteed fixed income payment to pay the recipients of their scheme.
which is why individual investors, or any investors not bound by the 7% return requirement, should NOT crowd into the area 'forced crowd in' by the pensions..
Are you saying other investors should stay away from corporate bonds so pension savers can get the investments? If it is shares with dividends then increased interest will increase the share price and dividend yield.
I actually think both of you make sense. I would split the baby. Looking at equities like JNJ, PFE, ABT, MSFT, AAPL, etc. you get the best of both world, growth + dividend. Then chase after QQQ and RUT.
In the UK I recommended to the government in the paper the pension problem now Modern Applied Macroeconomics by Peter James Rhys Morgan that the number of corporate bonds should be increased so pension funds could take advantage of the security it gave them. The financial crisis happened and then after that they used my suggestion and corporate bond availability has increased significantly. Pension saving has been made far more secure in the UK that and they use alterations in the way people pay into pensions to control economic targets, it has worked. You can see this at my website morganist economics in the Success page. I have been writing articles explaining the benefit of risk elimination in investment portfolios to protect the economic and pension funds around the world. I am concerned there will be a credit crunch in China that could spread to the rest of the world.
Stocks are the last asset class worth buying. No doubt. But anything with yield has already been bid up, so further chasing is more relying on the ‘greater fool’. Div doesn’t matter. The game has been shifted to buy backs long ago. You are from the UK? I understand the buy back game is not big in Europe yet compared to the US.