Banks and Cable/Telcos in the Dividend Sweet Spot

With the S&P/TSX Composite Index up 3.5% on a year-to-date basis, Scotia’s equity strategy team remains in the procyclical camp. Central bank tightening is typically seen as an inflection point between a cyclical and defensive bias. While remaining bullish on equities in the near-term, we highlight that the Canadian equity market is trading within 5% of our strategy team’s target of 14,750 for the S&P/TSX. With this in mind, we think the spotlight will soon refocus on dividend income as an increasing contributor to total returns.

In the Canadian context, we think the sweet spot for dividend income occurs at the confluence of a positive yield spread over government bonds and a dividend growth rate of at least 10%. As presented in exhibit 1 below, there is generally a trade-off between dividend yield and the growth rate of dividends. Defensive sectors tend to have higher yields but lower dividend growth, whereas cyclical sectors typically have lower dividend yields and potentially higher dividend growth rates.

At present, we think financials, particularly Canadian banks, and cable/telco stocks are in or about to enter the dividend sweet spot. After a two year hiatus caused by the financial crisis of 2008-2009, we think dividend growth for the bank group is set to resume. While the five-year compound average dividend growth rate of 7.4% for the bank group is healthy, dividend growth is likely to rebound to the low double-digit range in the coming years.

Above comments courtesy of my Portfolio Advisory Group group - Himalaya Jain

ATTENTION! - (Now that I have it... here is something worth taking a look at.)

Through the combined skills of my Scotia Capital team and the great people at Bloomberg, we have created a very interesting indicator: The Panic-Euphoria Indicator.

*ThePanic-Euphoria indicator is based on four factors including: the VIX index, S&P500 RSI, put-call ratio, and corporate credit spreads.

Here is the recent update (FYI):

The equity pullback continued yesterday with the S&P 500 retreating 0.6%.

Despite the recent decline, the S&P 500 is off 2.5% since its April 29 peak (1,363), our Panic-Euphoria indicator has yet to reach "panicky" levels. As illustrated in our Chart of the Day, the Panic-Euphoria is currently hovering in neutral territory.

The S&P 500 remains 7.8% above its 200-d moving average of 1,234, but the TSX and Shanghai A-share are hovering much closer. In fact, the TSX is standing 2% above its 200-d MA (13,094) and the Shanghai A-share is trading 0.8% above it. With China driving commodity sentiment, a break below its 200-d MA could spell further trouble for the commodity complex and commodity-related equities/indices.

*Entering this stage of the presidential election cycle, it is important to find indicators that one can track, and pair with other leading indicators, to help position ourselves for any upcoming corrections or, dare I say, Bear market directions... This particular study is interesting because we all try to remove emotion from our investment activity, and a great place to start is by looking at the emotional quotient of the overall markets... I hope to expand this indicator to other markets in the near future.

Best regards and safe investing.

E.

Sell in May and Go Away...?

"Sell in May and go away"?There’s an old adage on Wall Street called the Halloween indicator that says, “Sell in May and go away.” It refers to the belief that the period between end of October/beginning of November and April has significantly stronger growth than the other months. Will this saying prove true for 2011?

A bearish viewpoint – Those in favor of “Sell in May and go away” for 2011 * Since Halloween 2010, the S&P 500 is up more than 14%. In addition, in the past 25 months the S&P 500 is up more than 100%. Bears argue that we have come too far, too fast and a pull back in the stock market is warranted and should be expected. * The end of QE2. Bears point out to the strong correlation between stimulus and the rise in equities. When the Fed ceases the $600 million second round of quantitative easing next month, the stock market will recede. * High commodity prices. As prices for energy and food continue to rise, so too will corporate profits fall. Bears point to the fact that high commodity prices will be a huge hindrance to consumers as well. * Historically, the Halloween indicator has proven true – A $10,000 investment compounded to $527,388 for November to April in 60 years, compared to a $474 loss for May to October.

A bullish viewpoint – Those that disagree with “Sell in May and go away” for 2011 * The trend is your friend. Bulls point out that bears have been calling for a top for over a year now in the markets. Thus far it hasn’t happened and they don’t see the end in sight. * Throughout 2011 there have been many reasons for the market to justifiably pull back, here are just a few:

The violence in the Middle East and North Africa
The earthquake, tsunami, and subsequent nuclear emergency in Japan
Standard and Poor’s dropping it’s outlook to negative for US debt
Skyrocketing commodity prices
Rising inflation

In spite of all this, the S&P 500 is up 6.5% for 2011. Therefore, bulls point to the fact that if none of these major issues moved the market lower, why would anyone think the market is anything but strong?

* The Federal Reserve is committed to keeping rates extraordinarily low for an extended period of time. Most people think they won’t raise rates until 2012. Low rates are bullish for the stock markets.

* Historically, bulls point to historical data that stock prices rise 70% of the time during May through October when it’s the third year of a president’s term, as it is now for President Obama.

Thoughts?

*Courtesy of Matt Grossman - The Stockenthusiast