Greg Powell: Hi, I’m Greg Powell, Chief Investment Officer at Miller/Howard Investments.
Last November, Pfizer announced that it had successfully developed a vaccine for COVID-19.
This graph shows how profoundly this news impacted the stock market, shifting investors towards value stocks, high-yield dividend stocks, and small cap. The bars on the left show performance during 2020 prior to Pfizer’s announcement.
The stocks dubbed the Super Six, Facebook, Apple, Amazon, Netflix, Alphabet and Microsoft, were up a stunning 53% in 2020 prior to the vaccine announcement. During the year, the Super Six somehow morphed from stocks with exciting long-term growth stories to places to hide your money when it seemed like the pandemic would never end. As you can see on the right, the Super Six have trailed the market since the news.
High-yield dividend stocks and value stocks have both outperformed significantly since the vaccine news. Our interpretation is that investors, prior to any proof that a vaccine would work, were more willing to pay for the growth stories of expensive stocks rather than the cheaper earnings and dividends of value stocks. Essentially, investors thought there was no “bird in the hand option” given the uncertainties of the pandemic.
Progress on the vaccine front gave the market hope that we would not have to wait years for a recovery. This also gave a boost to the more cyclically tilted small-cap universe. The rebound in small caps is a good sign for both value and active management. Portfolio managers can, once again, be rewarded for sifting through long lists of potential investments from a wide range of market capitalizations, including stocks with good earnings and dividends that have been underappreciated by the market.
Despite the recent rally, the universe of high-dividend yield stocks remains cheap relative to the broad market. This graph shows that the forward P/E of the universe of high-dividend yield stocks is substantially below the P/E multiple for the S&P 500.
Relative to bonds, high-dividend yield stocks look like the superior income alternative. This chart shows the yield on the 10-Year Treasury Bond versus the high-dividend yield universe. Unlike bond coupons, equity dividends can rise over time. As compensation, bond interest rates were above equity yields for most of history. In recent years, however, monetary policy has pushed long-term interest rates well below what can be earned on high-dividend yield equities.
Even with the recent rebound in long-term interest rates, high-dividend yield equities offer substantially more income, both now and as it grows.
We believe the best strategy is choosing stocks with both good dividend yields and strong earnings growth potential, but that are trading at reasonable valuations.
Thank you for listening today, and for more information, please visit us at www.mhinvest.com.