Looking For Yield? This Is The Definitive Presentation For You | zero hedge

Random Glenings prides itself on being democratic.

I try to listen to other points of view, even if my initial temptation is to dismiss an analyst or commentator's viewpoint immediately.

So I have been stuck on this post that came from Zero Hedge last week.

As I written numerous times over the last few months, I believe that we in a disinflationary, if not deflationary, period for the next several years. I don't believe we will see serious price deflation, however, although I am increasingly concerned that government policies are not helping.

(This morning's Washington Post, for example, carried an editorial observing that for all of the bashing of Keynesian economics by Republican candidates, Keynes remains the foundation for many of the ideas espoused by those same candidates. Here's the link:

http://www.washingtonpost.com/wp-dyn/content/article/2010/09/10/AR2010091003754.html)

In any event, I have been an advocate of stocks paying attractive dividends for many of my clients. A number of stocks in several sectors of the market - consumer staples, utilities, and industrials - offer yields that are higher than bonds issued by the same corporation, and also offer the potential for longer term capital growth.

But there may be a reason these stocks look cheap, and may in fact turn out to be "value traps".

Zero Hedge cited a piece from Morgan Stanley which listed numerous reasons why investors should be wary of dividend payers. Here's the five reasons that Morgan Stanley feels that dividend yields are rising relative to corporate bond yields:

1. Possibility of a structural de-rating of stocks, i.e. investors may require higher expected returns from stocks;
2. An outlook for weak long-term earnings growth and reduced possibility of P/E expansion, meaning that dividend yields are a more dominant part of total returns;
3. Higher equity risk premium. We estimate the equity risk premium is ~5.2% versus an average of ~3.5% since 1990, meaning a higher dividend is required;
4. Investors doubt that companies can reinvest earnings to create value, so higher dividends make more sense;
5. Rising dividend yields can be interpreted in two ways: either risk premiums have permanently risen and dividend yields need to rise; or, long term earnings growth has shifted down, implying expectations of low GDP growth and even weaker earnings growth, which means that dividend yields need to rise to attract investors.

So, here's how Zero Hedge interprets dividends:

Surging dividend yields is not an indication that dividend stocks are cheap; on the contrary! It indicates an increasing loss of confidence in equity as an asset class.

Again, I am not sure I totally agree with this analysis.

I would note, for example, that corporations collectively have about $1.8 trillion in cash on their balance sheets, so they are hardly turning into ATMs for investors.

In addition, most companies I listen to either in person or on conference calls continue to indicate that they prefer stock buybacks to dividends as a way to return cash to shareholders. Moreover, companies cite that near-certain prospect of higher dividend tax rates in 2011 to bolster their belief that buying back stock remains a better way of increasing after-tax returns to shareholders.

But still: Arguing with the market tends to be an expensive, usually money-losing, proposition. If dividend yields are rising relative to corporate bond yields, it is a trend that bears further study.

Looking For Yield? This Is The Definitive Presentation For You | zero hedge