Even as the U.S. Federal Reserve has increased short-term interest rates, income-seeking investors remain hungry for yield as levels remain depressed across many asset classes. The search for yield has made income-generating securities more expensive—a condition that has many investors concerned that their opportunities for future gains may be more limited. In this environment, investments that offer undervalued yields may answer the need for more income and also eliminate the fear of overpaying for it.
High-Quality Assets Are Not Generating the Yield They Once Did
• Income-seeking investors are struggling to find yield in high-quality asset classes, even as interest rates are projected to increase.
• Yields are well below their historical averages across both stocks and bonds.
• In fact, the S&P 500 Dividend Index yield has now dipped below the yield generated by Treasuries for the first time in the past five years.
Even Riskier Asset Classes Are Offering Lower Yields
• The low-yield environment has pushed investors into riskier assets and untraditional sources of income.
• However, investors’ search for income in riskier assets has not generated high current yields relative to five-year averages.
• At the same time, both high-quality asset classes and riskier income-generating investments have become very expensive as a result of an overpriced market.
Investors May Benefit from Tilting to Dividend-Yielding Stocks with Lower Valuations
• To seek income beyond traditional bonds, many investors have moved to high dividend-yielding stocks or stocks that have been increasing their dividends (dividend growers).
• High dividend-yielding stocks have offered a more attractive level of income per unit of valuation than dividend-growing stocks, as indicated by the OFI Revenue Weighted Ultra Dividend Index (a high dividend-yielding stock index).
• A high dividend-yielding portfolio that regularly rebalances according to company revenues, specifically, increases exposure to stocks whose prices have gone down and can help investors meet the combined need of earning high income and not overpaying from a valuation perspective.
Key Takeaways for Investors and Advisors
- Income investors continue to seek out yield across many high-quality and riskier asset classes. Many have considered dividend-growing stocks, which may be appropriate for those comfortable taking on equity risk, but these stocks have become expensive.
- To earn higher income without overpaying, investors may want to consider a high dividend-yielding strategy weighted by underlying company revenues, because it consistently focuses on lower valuation dividend stocks.
- A high dividend-yielding strategy with exposure to inexpensive stocks could also serve as a complementary investment for those investors who still want to own stocks that have been growing their dividends.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. There is no guarantee that the issuers of stocks will declare dividends in the future, or that dividends will remain at their current levels or increase over time. The alternate weighting approach (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.