A new world of yield
It is interesting to note the dramatic convergence in yield in the market.
The prices of traditional high-yielding companies such as REITs (left-hand side of the chart) have been bid up, driving down yields. Perceived safe yielders such as utilities and insurance companies have concentrated on maximising their dividend payments.
Traditionally low-yielding companies in areas such as mining and energy have seen their share prices fall (right hand side of the chart) and have also increased their payout ratios where possible.
This has led to yield dispersion in the market falling to its lowest point in 15 years.
Banks are only yielding a 60 basis point premium to the market average – its lowest spread in 10 years.
The combination of this convergence and possible hikes in the US suggests that there may be some rotation in the market, away from the defensive “bond proxies” that have done so well in recent times.
We continue to prefer high-quality cyclicals – particularly those which may be rewarded for an increased dividend yield.