Dividend yields give stocks an edge over bonds

With equity markets reaching levels not seen since the financial crisis in 2007 and 2008, the recent rally has underscored positive fundamentals.

Corporate profits have risen since the recession

However, while we believe the stock market today offers many attractive opportunities, our view is probably more tempered than it was a year ago. The most compelling case for equities today is their potential relative to other asset classes. In many cases, equities have been delivering better dividend yields than their fixed-income counterparts, while offering the added benefit of capital appreciation potential.

While dividend-paying stocks have already attracted considerable demand from investors, we see opportunity in companies that can offer dividend growth. We’ll be looking carefully at companies with traditionally high payout ratios and high dividend growth rates, as these don’t appear to be as stretched from a valuation perspective. As an example, I would point to the financials sector — the real epicenter of this trend, where payout ratios are quite low relative to what we have seen historically. Dividend growth potential in a number of sectors is a theme for 2013.

U.S. equity valuations, though less attractive than a year ago, remain reasonable, particularly in areas such as the financials sector, which appears to be at the midpoint of its overall earnings recovery.