Daily Bullets……for July 22, 2014

·         Dividend stocks aren’t boring……The author of this article points out that low dividends (or low dividend payouts) don’t necessarily lead to higher dividends at a later time, and that strong companies that pay a high dividend (dividend payout) are more disciplined in their capital decisions, which leads to higher returns.

What’s the point: This is a timely article for a number of reasons. First, it appears that the outperformance of small cap stocks is giving way to large caps and dividend stocks. We believe there are several reasons for this. One is investor anticipation of the Fed raising interest rates in 2015 This would theoretically reduce financial system liquidity which is a negative for small caps. Also, we believe investors have embraced the idea of a sustained “slow growth” environment (GDP growth of 2-3%), with low inflationary pressures and low wage growth. The yield on the 10-year Treasury bond at 2.47% is one manifestation of this view.  In this environment, we believe a paramount factor for investors is free cash flow, ability to grow free cash flow, and convert this into dividends ( and/or rising dividends). This is one of the reasons why we continue to favor large cap stocks and recently reduced our exposure to developing (smaller cap) equities. It is also a factor that is driving the current high level of M&A activity, which is another form of support for equities. An increase in interest rates by the Federal Reserve will have little if any impact on all this, in our opinion, as long as economic growth and inflation remain moderate, which we expect.  Link: http://seekingalpha.com/article/2327925-why-dividend-payers-arent-boring?ifp=0

 

·         Existing Home Sales Accelerating…..U.S. home resales in June rose to their highest pace in eight months, up 2.6% and above analysts’ expectation.

What’s the point? This is another positive for the economy. Housing is a major element of the economy with a significant multiplier effect. While housing data can be “choppy” from month to month, we think the trends in the data point to gradual improvement in the housing sector. This has positive implications for sustaining economic growth and corporate earnings, which is the key driver for stocks. Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140722&id=17795033