Don’t buy bonds. Don’t focus solely on dividend yield, and avoid highly leveraged firms is the message that BlackRock gave investors a few weeks ago when it spooke to BT. Relevant exceprts from BT article from yonks ago I rediscovered.
Michael Steinhardt, whose hedge funds returned more than 20% a year for almost three decades, also doesn’t believe in bonds
“Bonds are no place to be,” Steinhardt, 71, who is now chairman of New York-based WisdomTree Investments Inc., said in an interview today on Bloomberg Television’s “Money Moves” with Carol Massar. “Equities are cheap by historic standards. Equities that pay high dividends relative to bonds, relative to the stock market, I think that’s a good place to be.”
And so does Abby Joseph Cohen, senior U.S. investment strategist at Goldman Sachs. In mid-April, she said equities will give better returns than bonds in the mid-to-long term as companies look to emerging markets for growth.
“You need to go back to the late 1950s to see a situation which equities were priced as attractively as they are now relative to bonds,” she said in a Bloomberg Radio interview. “1958-1959 was a period in which investors were very concerned about the economy and the yields on many equities exceeded the yields on fixed income at that point and — as you know — we moved into a multidecade bull market in equities.”
HIGH dividend yields should not be the sole focus in assessing equity returns over time, said Stuart Reeve, managing director and portfolio manager at BlackRock.
According to Mr Reeve, data collated over the last 31 years has indicated that more than 90 per cent of long-term equity returns can be jointly attributed to both dividend yield and dividend growth drive.
Generating long-term equity returns successfully thus requires identifying companies with attractive yields that are competitively advantaged and have the ability to sustain business growth.
To ensure a company is able to invest and grow its business, Mr Reeve stressed the need to factor in cost and cash available to a company to fund these developments.
‘That is so often a question that people do not ask in this space. What is the cost of growth? In different industries, it is different,’ he emphasised.
‘In a more stable industry, where the rate of change of the industry dynamic is not significant and not very fast, and you are competitively advantaged, your cost of growth tends to be relatively low.’
Identifying a company with low growth costs has its merits as it enables the company to reinvest and grow its business, with the company better positioned to commit some of that cash back to shareholders in the form of a dividend stream.
Investors should also exercise patience in order for results to materialise.
‘You must be willing to buy these investments at fair value and let the yield and growth compound for you and deliver great returns with lower volatility over medium to long-term horizons,’ said Mr Reeve.
Investors should also steer clear from companies which are leveraged to the tilt, he cautioned, citing the significant correlation between high leverage and cuts to dividends.
The focus on equity investment comes on the back of BlackRock chief executive Larry Fink’s message urging investors to scrap the inadequate 60/40 portfolio mix of stocks and bonds.
Mr Fink personally advocated a 100 per cent investment in equities owing to valuations and higher returns than bonds.
‘Virtually every investor has to find ways to achieve better returns than they’ll get in cash or government bonds for the foreseeable future,’ said Mr Fink. [ BTW, Kapito, a co-founder and president of the firm, told CNN Money last month that he has about 70% of his investment portfolio in dividend-paying global stocks. ]
BlackRock, the world’s largest asset manager with assets under management totalling US$3.51 trillion as at Dec 31, 2011, has increasingly set its sights on growing in Asia.