Have you noticed the latest trend in the markets lately? Bonds are not the employee of the month anymore. In fact, it’s not just about bonds not paying low interest rates anymore; we see massive cash movements leaving the bond market. Not a believer? Here’s what’s happening right now on the bond market:
As you can see, latest data shows the 4 last months (from April to July 31st) showing a net negative outflow of cash from the bond market. In other words, investors are selling off their bonds massively.
What’s Happening with Bonds?
There are two reasons explaining why bonds are less interesting than a warm beer left on a counter for the month of August. The first reason is well known since 2008: new bonds can’t beat inflation with their low interest rates. There was a nice ride for bond holders from 2008 till the end of 2011 since interest rates continued to drop. Current bond values at that time went up and brought unrealistic returns to bond investors. When you think about it, an investor who left the stock market in 2008 and looked at the bond returns from 2008 to 2011 thinks he’s the next Buffett. For almost no risk, it was possible to reach over 5% annualized return for 4 years! Investors who never touched the stock market started to think that the right way to invest was the bond way.
The problem is this small ride was only temporary since interest rates can’t decrease forever. 5 years after the first interest rate drop, old bonds can’t gain in value and new bonds are paying minimal interest. Bond funds and ETFs are not the most appealing investments now.
The second reason is even more obvious: while adverse risk investors were happy with their meager rate, they can’t stand negative returns. If your hideout starts to boil, you don’t want to stick around and you have to get out of it. The boiling signal was launched back in June when the FED minutes were published. Half of the committee was leaning towards a QE tapering (the NEW buzz word on Wall Street). In other words; the FED started to talk about slowing down its unconditional help and wanted to reduce its appetite for bonds. The FED currently buys for $85B in bonds per month in order to put artificial pressure on interest rates to keep them low.
Clouds were forming over the bond market and it was enough for several investors to jump ship and sell their bonds massively. It was one thing to hold bonds not paying much, but it’s unsustainable to hold bonds that are losing value and not be compensated by interest payments!
Where The Money Goes? How Can You Make Money From This?
First, forget about the first cash movement that occurred from April to July. That money is already off the bond market and reinvested. There is nothing you can do with past information like this. “That was a nice parade, did you participate?”. If not, it’s just too late.
The good news is that I think the movement is not over yet. The FED surprised the market last week by continuing their quantitative easing measures at $85B per month. Therefore, bond interest rates will continue to be mediocre and the cloud of rising interest rates will appear once again in a few months. This is how you can make money from massive cash movement out of the bond market. By preparing now for what is coming next! But to do this, you need to know where the money went in the first place…
Where is the Money Right Now
Surprise, surprise! If the money is not in the bond market, where could it be? You guessed it right; the money is leaving bonds for the stock market. This is not really surprising, but you need to do something about it.
If you think like a conservative investor, where would you put your money if you don’t invest it in bonds? The answer is most probably in dividend stocks. Why? Because dividend stocks are usually well established companies generating a positive cash flow. We are already in a better position than holding bonds with a potential loss of value in the upcoming months!
When you look at “relatively safe” companies operating in consumer products (it’s a classic for conservative dividend payers), you can already see this new reality affecting their prices. There are several stocks trading with a P/E ratio over 20 in this industry. Just to name a few, here’s a quick list:
Merck & Co (MRK) – 28.45
Colgate-Palmolive (CL) – 25.05
Procter & Gramble (PG) – 20
AT & T (T) – 20.65
Texas Instrument (TXN) – 22.25
Verizon (VZ) – 86.89
Waste Management (WM) – 22.71
My gut tells me these companies will continue to grow in the upcoming months. However, I’m not too keen on buying a stock that is already overvalued. Are you?
I would rather look at an underdog that didn’t benefit from this first cash movement. At one point, institutional investors will do the same. As a fund manager, you can’t simply invest all your new money in Procter & Gamble and think it’s right. This is why they will turn to other buying opportunities. If 20 is the new “acceptable” P/E ratio for dividend paying stocks, then it’s time to look at stocks under this level.
Since I’m a good guy, I pulled out a short list of stocks that are still attractive in the current stock market. As usual, I’m using dividend metrics explained in my book Dividend Growth to create my list. Remember; these are not stock recommendations, only numbers. You NEED to pursue further analysis before making your trades.
| Ticker | Name | Price | Dividend Yield | Payout Ratio | Dvd 5Y Growth | EPS 5Y Growth | Sales 5Y Growth | P/E |
|---|---|---|---|---|---|---|---|---|
| NYMT | New York Mortgage Trust Inc | 6.27 | 17.22 | 109 | 30.99 | 32.05 | 74.52 | 6.33 |
| GNI | Great Northern Iron Ore Properties | 68.3772 | 15.21 | 104.64 | 4.52 | 11.18 | 10.61 | 6.61 |
| DX | Dynex Capital Inc | 8.82 | 12.23 | 86.78 | 19.3 | 18.97 | 39.96 | 5.66 |
| MFA | MFA Financial Inc | 7.47 | 11.78 | 105.11 | 21.13 | 5.35 | 2.93 | 9.77 |
| NRP | Natural Resource Partners LP | 19.09 | 11.52 | 111.56 | 2.23 | 72.7 | 4.69 | 10.26 |
| CNSL | Consolidated Communications Holdings Inc | 17.36 | 8.93 | 1028.23 | 0 | 493.09 | 10.94 | 17.53 |
| TNH | Terra Nitrogen Co LP | 201.6065 | 7.97 | 176.9 | 2.73 | 10.56 | 0.03 | 11.16 |
| OLP | One Liberty Properties Inc | 20.34 | 6.88 | 167.53 | 2.3 | 23.09 | 5.77 | 18.49 |
| MAIN | Main Street Capital Corp | 30.09 | 6.38 | 49.02 | 9.76 | 10.5 | 64.79 | 16.72 |
| ARLP | Alliance Resource Partners LP | 74.75 | 6.17 | 68.28 | 13.37 | 33.83 | 15.26 | 10.66 |
| EPB | El Paso Pipeline Partners LP | 42.64 | 5.91 | 104.5 | 27.98 | 7.9 | 90.11 | 19.74 |
| TAL | TAL International Group Inc | 47.5 | 5.73 | 60 | 10.54 | 65.25 | 12.27 | 14.52 |
| AHGP | Alliance Holdings GP LP | 59.66 | 5.26 | 83.12 | 20.32 | 25.69 | 15.27 | 15.82 |
| ASBN | ASB Financial Corp | 13.76 | 5.23 | 46.97 | 0 | 13.38 | 2.12 | 10.92 |
| HTCO | HickoryTech Corp | 11.4 | 5.09 | 91.83 | 3.86 | 4.56 | 4.25 | 17.8 |
| TGH | Textainer Group Holdings Ltd | 37.84 | 4.97 | 40.33 | 16.18 | 12.97 | 15.78 | 10.75 |
| WSTG | Wayside Technology Group Inc | 12.88 | 4.97 | 54.49 | 1.3 | 13.99 | 10.84 | 10.39 |
| DRI | Darden Restaurants Inc | 46.4 | 4.74 | 64.09 | 22.6 | 0.75 | 4.05 | 16.33 |
| UVE | Universal Insurance Holdings Inc | 7.17 | 4.46 | 60.12 | 9.67 | 22.38 | 11.8 | 6.42 |
| PAA | Plains All American Pipeline LP | 53.03 | 4.53 | 86.91 | 5.67 | 116.5 | 10.12 | 15.41 |
| WR | Westar Energy Inc | 30.99 | 4.39 | 61.45 | 3.44 | 106.62 | 4.8 | 13.08 |
| LMT | Lockheed Martin Corp | 127.83 | 4.16 | 49.65 | 22.32 | 4.81 | 0.7 | 12.2 |
| XEL | Xcel Energy Inc | 27.82 | 4.03 | 57.67 | 3.3 | 10.92 | 0.77 | 14.58 |
| PNW | Pinnacle West Capital Corp | 55 | 3.96 | 75.48 | 0.75 | 5.83 | 0.87 | 14.29 |
| LLY | Eli Lilly & Co | 50.31 | 3.9 | 53.36 | 1.33 | 6.91 | 3.12 | 12.8 |
| FKYS | First Keystone Corp | 26.75 | 3.89 | 50.01 | 3.4 | 16.64 | 2.53 | 12.92 |
| CMS | CMS Energy Corp | 26.44 | 3.86 | 66.74 | 25.72 | 14.45 | 0.83 | 16.4 |
| CCNE | CNB Financial Corp/PA | 17.08 | 3.86 | 47.93 | 0.62 | 0.17 | 5.46 | 13.14 |
| WEC | Wisconsin Energy Corp | 40.6 | 3.77 | 50.58 | 20.78 | 16.92 | 1.75 | 17.06 |
| PWOD | Penns Woods Bancorp Inc | 48.67 | 3.86 | 52.09 | 2.97 | 38.02 | 6.42 | 13.48 |
| ESV | Ensco PLC | 54.46 | 3.67 | 28.61 | 79.72 | 10.56 | 21.57 | 9.45 |
| MBCN | Middlefield Banc Corp | 28 | 3.71 | 31.87 | 0.72 | 19.49 | 1.92 | 8.7 |
| RSKIA | George Risk Industries Inc | 8.23 | 3.65 | 0 | 25.06 | 40.1 | 2.97 | 11.45 |
| MRK | Merck & Co Inc | 48.77 | 3.53 | 83.87 | 2.5 | 6.89 | 17.53 | 14.05 |
| SXL | Sunoco Logistics Partners LP | 66.84 | 3.59 | 43.11 | 13.56 | 29.67 | 16.63 | 15.25 |
| IDA | IDACORP Inc | 48.95 | 3.51 | 40.71 | 4.84 | 27.71 | 6 | 13.05 |
| MXIM | Maxim Integrated Products Inc | 30.41 | 3.42 | 61.94 | 5.15 | 112.35 | 5.99 | 19 |
| OLN | Olin Corp | 23.18 | 3.45 | 42.85 | 0 | 17.51 | 10.02 | 12.26 |
| KMB | Kimberly-Clark Corp | 94.07 | 3.44 | 66.46 | 6.91 | 7.56 | 1.12 | 16.78 |
| MAT | Mattel Inc | 42.33 | 3.4 | 55.08 | 13.13 | 58.87 | 1.77 | 17.63 |
| GEF | Greif Inc | 49.83 | 3.37 | 63.02 | 4.94 | 5.31 | 4.06 | 16.5 |
| HAS | Hasbro Inc | 47.56 | 3.36 | 55.62 | 16.12 | 4.76 | 0.21 | 17.2 |
| CA | CA Inc | 29.79 | 3.36 | 48.48 | 44.27 | 15.41 | 0.84 | 11.92 |
| MCD | McDonald’s Corp | 96.18 | 3.37 | 53 | 15.48 | 6.27 | 3.39 | 17.63 |
| CAG | ConAgra Foods Inc | 30.345 | 3.29 | 52.55 | 5.64 | 5.65 | 7.11 | 14.88 |
| NEE | NextEra Energy Inc | 80.57 | 3.28 | 52.33 | 8.13 | 25.4 | 1.59 | 16.93 |
| HWCC | Houston Wire & Cable Co | 13.41 | 3.28 | 37.41 | 3.92 | 32.1 | 5.07 | 14.27 |
| CNL | Cleco Corp | 45.32 | 3.2 | 48.38 | 9.24 | 15.11 | 1.07 | 18.2 |
| FRFC | First Robinson Financial Corp | 30.5 | 3.28 | 20.04 | 5.92 | 188.1 | 5.11 | 6.79 |
| SON | Sonoco Products Co | 39.4 | 3.15 | 61.88 | 2.85 | 5.09 | 3.33 | 18.5 |
| GIS | General Mills Inc | 47.8 | 3.18 | 46.79 | 11.22 | 15.36 | 4.63 | 17.39 |
| CNK | Cinemark Holdings Inc | 32.33 | 3.09 | 57.57 | 4.1 | 19.18 | 9.77 | 19.47 |
| K | Kellogg Co | 58.51 | 3.14 | 64.72 | 6.99 | 3.89 | 2.3 | 17.79 |
| IP | International Paper Co | 45.3999 | 3.08 | 65.02 | 3.71 | 22.48 | 4.82 | 15.91 |
| ANCX | Access National Corp | 14.19 | 3.1 | 109.92 | 93.32 | 45.48 | 6.4 | 8.4 |
| DD | EI du Pont de Nemours & Co | 58.56 | 3.07 | 67.29 | 1.42 | 20.17 | 3.65 | 19.3 |
| MFI | MicroFinancial Inc | 7.85 | 3.06 | 36.97 | 3.71 | 13.43 | 10.25 | 12.27 |
| JNJ | Johnson & Johnson | 87.09 | 3.03 | 60.89 | 7.74 | 20.51 | 1.86 | 16.55 |
| MGEE | MGE Energy Inc | 54.78 | 2.97 | 54.35 | 2.23 | 5.07 | 0.91 | 17.96 |
| BAX | Baxter International Inc | 65.875 | 2.98 | 37.19 | 16.66 | 5.34 | 2.93 | 14.26 |
| KO | Coca-Cola Co/The | 37.94 | 2.95 | 50.94 | 8.15 | 15.23 | 8.66 | 18.68 |
| AWR | American States Water Co | 27.65 | 2.93 | 44.56 | 8.01 | 14.67 | 8.6 | 18.21 |
| CPK | Chesapeake Utilities Corp | 52.62 | 2.93 | 47.84 | 4.56 | 33.78 | 14.5 | 15.75 |
| CAT | Caterpillar Inc | 83.88 | 2.86 | 23.22 | 7.57 | 15.96 | 6.4 | 12.39 |
| TUP | Tupperware Brands Corp | 86.92 | 2.85 | 41.66 | 20.33 | 110.35 | 3.85 | 19.21 |
| PEP | PepsiCo Inc | 79.56 | 2.85 | 53.67 | 6.67 | 5.86 | 10.03 | 18.17 |
| RTN | Raytheon Co | 77.46 | 2.84 | 34.04 | 14.98 | 22.72 | 0.87 | 12.1 |
| HFC | HollyFrontier Corp | 41.97 | 2.86 | 36.85 | 61.18 | 105.81 | 35.42 | 5.32 |
| DK | Delek US Holdings Inc | 21.2553 | 2.82 | 13.01 | 20.96 | 176.66 | 22.57 | 4.47 |
| SYBT | SY Bancorp Inc | 28.81 | 2.78 | 41.44 | 3.61 | 2 | 1.36 | 14.93 |
| OMI | Owens & Minor Inc | 34.85 | 2.75 | 51.08 | 12.86 | 4.25 | 5.15 | 19.19 |
What are you doing with your money?
Currently, I’m 100% invested in the market, what are you doing on your end? Bonds, stocks or waiting on the sideline?
disclaimer: I own shares of KO, MCD and JNJ
The post Massive Cash Movement Outside Bonds – What’s In It For You? appeared first on The Dividend Guy Blog.
