According to S&P DowJones Indices, 504 U.S. companies announced higher dividends in the secondquarter. Investors have been increasingly seeking exposure to dividend-payingstocks in light of low-bond yields. But they should look beyond the traditionalhigh-dividend yielding sectors, according to TCW Group Inc. portfolio manager Diane Jaffee.
Jaffee manages $6.5 billionacross various dividend strategies, including TCW Relative Value DividendAppreciation (TGIGX) and TCW Relative Value Large Cap (TGDVX). In a recentinterview with Todd Rosenbluth, director of exchange-traded fund and mutualfund research at S&P Global Market Intelligence, Jaffee highlighted thegrowth potential she sees for the financial services sector and how itsdividend payout ratio compares to the consumer staples and utilities sectors.
The following is an editedtranscript of that conversation.
TCW Senior Portfolio Manager Diane Jaffee
S&P Global MarketIntelligence: Investors favored dividend-paying stocks in the first half of theyear. Why do you think that has been the case?
Diane Jaffee: There has been high amountof money withdrawn from equity funds in 2015 and to start 2016, so clearly investors are acting in adefensive manner. Dividend stocks can serve as a bond proxy in a low-rateenvironment.
Consumer staples, utilitiesand telecom services stocks have been beneficiaries of investor attention. Doyou think these sectors still offer attractive opportunities?
Utilitieswas the best performing sector in the first half, but when we look at theprice-earnings ratio in the S&P 500 of this sector and the consumer staplessector, they are both trading at one standard deviation above their historicalaverage. In addition, these sectors are at the high end for dividend payoutratios using GAAP earnings. Consumer staples and utilities are at 64% and 66%,respectively. So while we believe you can find individual securities in thosesectors, we are underweight. We prefer to be in sectors where there is more drypowder to increase their cash payout.
Is the financial servicessector one of those sectors where you think dividends can grow?
Thefinancials S&P 500 payout ratio is 41% of earnings and this currentlyincludes REITs that are being carved out in September into its own and where higherdividends must be paid out. CitigroupInc. was just offering a dividend yield of 0.2%, before the JulyCCAR results. Now thestock yields 1.5% after a dividend. JPMorganChase & Co. is another company that raised its dividend thisyear, but we think there is more growth to come.
What other areas within thesector do you find appealing?
Withininsurance, we hold AllstateCorp. and MetLifeInc. In addition, we think Intercontinental Exchange Inc. has been a beneficiary ofBrexit. They own the New York Stock Exchange and they trade Brent crude and volatilityoptions, so increased trading has been a big positive for them. They have adividend yield that is lower than the market, but have a low 26% payout ratio.
Do financials need theFederal Reserve to raise interest rates to generate growth?
WhenJPMorgan reported its second-quarter results, the answer was, emphatically, no.Their base case for net income for this year is a flat 10-year Treasury bond.However, investors are missing that JPMorgan has been generating strong coreloan growth even without the Fed. While it would be easier to generate growthwith higher rates, banks are lending already. Commercial and industrial loansfor U.S. banks are up 11% in 2016, compared to European banks at less than 1%.We think U.S. banks are at the end of the deleveraging cycle.