Dividends from US Companies

Chasing yield without paying attention to fundamentals is risky but despite the rally there remains a valuation gap between equities and fixed income

J.P. Morgan Asset Management 23 July, 2014 | 10:45AM
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This article is part of Morningstar's Guide to Investing for Income

Whilst investing in dividend paying stocks has been a good strategy for investors the last several years, there is a rising concern that dividend paying stocks may be vulnerable if the anticipated rise in bond yields eventually materialises.  With the US Federal Reserve on a path to gradual tightening, 10 year Treasury yields are likely to move up from what have been surprisingly low levels.  Some market participants believe this means that income producing stocks will no longer look as favourable relative to bonds. Heedlessly chasing yield without paying attention to fundamentals is indeed risky, but in our view investors taking a cautious approach can still reap the benefits of dividend stocks.

Despite US equities valuations being at fair value, there remains a valuation gap between equities and fixed income. Our calculated equity risk premium over 10-Year Baa Corporate bonds stands at 1.6% as of 31 March 2014, as shown in the chart below. If you believe the economic expansion in the US is sustainable, there is justification for maintaining an overall constructive outlook on US equities.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

J.P. Morgan Asset Management  is the investment arm of JPMorgan Chase & Co. and it is one of the largest active asset managers in the world.