Barron's : Why There’s Still a Case for Stocks

Why There’s Still a Case for Stocks

While TINA might be dead, the dividend trade is most certainly not.

Remember TINA? No, not Tina Turner, who hasn’t released a new album since 1999. We’re talking about the popular acronym for “There is No Alternative,” referring to the argument that stocks are the only choice for income when bonds yields are ridiculously low. And there’s a good chance that it has gone to same place that the once-greats go when their time has come and gone.

It’s easy to see why TINA was so popular. At recently as the end of July, the S&P 500 yielded 2.21% to the 10-year Treasury’s 1.37%. Today, however, that yield premium has completely disappeared: The S&P 500 yields just 2.06% to the 10-year’s 2.54%. If “you were justifying your investments in equities because of their valuations relative to Treasuries, then you don’t have nearly as much of a leg to stand on,” notes Bespoke Investment Group’s Paul Hickey.

Thankfully, there are other reasons to own stocks. Though the number of stocks with Treasury-beating yields has dropped from more than 200 to just over 100, says Stuart Freeman, co-head of global equity strategy at Wells Fargo, he isn’t worried about the effect on the overall market. The reason: Expectations for faster profit growth in 2017. “Earnings growth represents a competitive return factor for stocks that bonds do not offer,” he says.

Still, while TINA might be dead, the dividend trade is most certainly not, argues Strategas Research Partners’ Nicholas Bohnsack. When bond yields start rising, investors gravitate to stocks that offer dividend growth, as well as current yield. A basket of such stocks has returned more than 16% during periods of rising 10-year yields going back to 1993, according to Strategas data, well above the returns from consumer staples, telecom, and utilities. Stocks currently in the Strategas Dividend Growth basket—which haven’t produced market-beating gains this year—include pharmaceutical giant Abbott Laboratories (ticker: ABT), Scott-brand tissue paper maker Kimberly-Clark (KMB), and chip-manufacturer Intel (INTC).

And even utilities might have their place in a stock portfolio. Yes, 2017 is likely to be a tough year for the sector thanks to rising rates, tax reform, and higher inflation. But even in that environment, some utilities maintain their appeal, says Deutsche Bank analyst Jonathan Arnold, who upgraded Eversource (ES) and PSEG (PEG) to Buy from Hold last week. Arnold cites Eversource’s strong balance sheet and the possibility that earnings per share could grow by as much as 7% through 2019, despite holdups in some major projects. PSEG should benefit thanks to its smaller debt load, and potential regulatory changes under a Trump administration that could make its nuclear business less of a drag on earnings.

TINA is dead. Long live TINA.