Income obsession sweeps asset classes as stocks diverge

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(Bloomberg) – Behind the latest rally in equities, there is a growing penchant for steady streams of income as risk appetite is hot and cold this year.

In the $6.6 trillion exchange-traded fund arena, three dividend-focused ETFs rank among the top 10 in terms of stock inflows, according to data compiled by Bloomberg. The leader, the $36.5 billion Schwab US Dividend Equity ETF (ticker SCHD), has seen just five exits this year.

In the bond market, a mix of falling buying behavior and growth concerns sparked a strong rally in Treasuries after benchmark yields hit multi-year highs last month. Billions have been funneled into corporate debt, with the S&P 500 earnings yield holding the smallest advantage over the average yield on blue-chip bonds in more than a decade.

Demand for coupon breaks and reliable payments cast a cautious light on the biggest two-day rally on record following the Federal Reserve’s rate decision. As Fed Chairman Jerome Powell on Wednesday hinted at the potential for small rate hikes in the future, skeptics warn that persistently high inflation will prevent a pivot and send the economy into a recession. In this context, it makes sense to play it safe, according to AlphaTrAI’s Max Gokhman.

“The common denominator is defence,” said Gokhman, the company’s chief investment officer. “High-quality corporate debt and buying shares of companies with resilient balance sheets that can afford to pay a consistent dividend without worrying about excessive leverage or margin pressure is logical.”

While the S&P 500 climbed 9% in July, on track for its biggest month of gains since November 2020, the index is still down 13% this year. Strong earnings recently reassured traders, but uncertainty around a US recession and the trajectory of Fed rate hikes kept traders on their toes.

The up-and-down nature of equities has made bonds more attractive to some investors. The average yield on investment grade bonds is currently 4.35%, while the S&P 500 “yields” around 4.8% in earnings. That’s near the smallest gap since 2010.

“Really, where we’re starting to see opportunities is in the credit markets,” Russ Koesterich, portfolio manager of BlackRock’s global allocation fund, told Bloomberg Television. “If we’re going to be in an environment where equities are going to be volatile over the next few months, one of the things you can do in your portfolio is add carry. You can add income.

According to Karissa McDonough of Community Bank Trust Services, the relatively high yields on investment grade bonds mean that, unlike much of the past decade, investors don’t even have to “dive” into quality to earn attractive returns. . It’s an attractive proposition with recession fears on high alert.

“In corporate bonds, especially high-quality corporates, we’re seeing returns above 5% in some of these areas, which we haven’t seen in a long time,” said McDonough, securities strategist at fixed income, in a Bloomberg Television. interview. “It’s real money, real income and a good opportunity as long as you’re selective.”

Likewise, a volatile stock market this year has pushed investors toward ETFs that somehow guarantee stable income. SCHD, which raised nearly $8.3 billion this year, is on course to surpass the 2021 record of $9.8 billion. And more than $6.3 billion has been paid into the JPMorgan Equity Premium Income ETF (JEPI) of $11.5 billion year-to-date, while the $46.1 billion Vanguard High Dividend Yield ETF (VYM) brought in $6 billion in 2022 – a record.

ETF issuers were quick to try to capitalize on the trend. Launches and requests for income-oriented funds have increased this year, with strategies ranging from buying stocks of dividend-paying companies to selling call options on the S&P 500.

But the hunt for income isn’t as simple as chasing after the highest-paying stocks, according to Dan Suzuki of Richard Bernstein Advisors, whose firm has added high-quality dividend-paying stocks and long-dated bonds in recent weeks. .

“High dividend payers are like high-yield bonds — there is assessed risk to the extent the dividend is reduced,” said Suzuki, the company’s deputy chief investment officer. But longer-dated Treasuries and higher-quality dividend-paying stocks are “both an attractive way to get defensive in the portfolio.”

©2022 Bloomberg LP

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