In a low-rate world, high-dividend stocks have become an increasingly attractive option. And contrary to those who argue that many dividend payers have become overvalued and are due for a drop, Jeremy Siegel says the rush to dividend names is just beginning.
“I think we’re in the first inning of shifting to dividend-paying stocks,” the finance professor at the University of Pennsylvania’s Wharton School said Tuesday on CNBC’s “Trading Nation.”
Even though the Fed may raises rates this year, “investors are becoming convinced they’re not going to be able to rely on CDs, their bank accounts, or even bonds as a source of income,” and may thus determine that “maybe they’d better turn to stocks,” he said.
“Equities are the major income-producing asset of the future.”
Given that many stocks with well-supported dividends are yielding up to 4 percent even as the 10-year Treasury yield remains below 2 percent, Siegel floats the idea that “maybe we’ll go back to the period of the ’50s and early ’60s, when people really did buy stocks for their income-earning aspects, and that was a source of very good demand and very good stock returns.”
When viewed in this light, stocks offer a somewhat unique value proposition, and can benefit from a few different turns of events. If rates stay low, the dividends offered by equities will continue to make them a necessary holding for yield-seekers. If rates rise due to a strengthening economy, companies could also see earnings increase. And if inflation somehow rears up again, stocks will likely be the asset of choice, given their proven ability to rise alongside inflation — a connection that makes sense given that companies can generally pass along higher prices to their consumers.
Once one appreciates these dynamics, it should be no surprise to hear that the scenario Siegel most fears is the one in which inflation surges without a concurrent strengthening of the economy.
“The biggest concern that we’d see is an upturn in inflation with no increase in demand,” Siegel said. Right now “we’re getting some firmness in prices, but it means the world economy is increasing. I would worry if I just saw a flare-up in prices, and the Fed really pulled hard,” increasing rates quickly in order to tamp it down.
“I don’t think that’s going to happen,” Siegel added.
To be sure, Siegel isn’t enamored of companies’ turn toward dividends from a macroeconomic perspective. He sees the lack of productivity growth as a major issue for the economy, remarking that “firms don’t see a persuasive reason to invest,” which is “why you’ve got dividends and buyback — that’s what they’re doing with their money.”
“But as least they’re returning it to the shareholders,” he added. “Things could be worse.”