You might have heard that there was a total eclipse of the Sun over the Australian mainland last week. Indeed, you might even have been one of the tens of thousands that crammed into Far North Queensland to witness it. If so, then I hope you had as much luck as I did in Port Douglas, with the clouds parting on cue to deliver an awesome spectacle.
The Carlisle family prepares for a moment of clarity …
These days, people mostly travel to see eclipses for their natural splendor, but in the nineteenth century they played a crucial role in helping scientists understand the physics of the Sun.
You see eclipses offered the only opportunity to see the Sun’s mysterious atmosphere or ‘corona’, which is normally obscured by the glare of the Sun’s much brighter, though curiously much cooler surface.
It’s a curious paradox that you can understand more about the Sun by blocking most of it out, and you get a similar thing in the sharemarket.
Right now, the ‘glare’ of the financial media—with all the hubbub around fiscal cliffs in the US and fiscal compacts in Europe—is obscuring the fact that the dividend yield on shares has overtaken the yield on bonds. I don’t have the data to hand for the Australian sharemarket, but for the S&P 500 in the US, apart from a few months in 2008/9, you have to go back to the 1950s for the last time this was the case.
The reason, of course, that shares yielded more back then was that investors were concerned about the safety of corporate profits and dividends. And with good reason—they had two world wars, the busting up of the gold standard and a great depression to deal with.
… and gets it.
But it’s not as if bonds and cash were without risk – just ask a Hungarian. Hyperinflation after World War II led to the replacement of the Hungarian pengo in 1946 by the forint, with the country’s entire stock of the former being worth less than just one of the new currency. That even puts the equity dilution on a property trust in the shade.
Right now, investors are fearful of debt levels in the US and Europe and an economic slowdown in China, amongst other things. Again with good reason. But again—with government printing presses running overtime—there’s also plenty of risk in bonds and cash.
Still, we don’t doubt that some companies will see their dividends come under pressure and for this reason we’d suggest being cautious of companies with little pricing control, high capital requirements and poor cash flow.
Yet there are a number stocks around at the moment that yield as much or more than bonds and cash, but with bulletproof dividends and even good prospects for growth.
The Sun returns.
Woolworths makes a good example, with a dividend yield of 4.7% based on the 132 cents of dividends expected in the current year. No-one expects this dividend to be cut but, even if it was, it would have to fall a long way to match the 3.1% currently available on 10-year Australian government bonds.
Even Seek’s forecast dividends for the current year of about 20 cents give it a yield in line with government bonds. Yet its dividend is covered twice by earnings despite low capital requirements, and it has delivered average growth of 15% a year over the past five years, with the same forecast for the next three.
By the time the next total eclipse rolls over the Australian mainland on 22 July 2028—right through Sydney this time—these companies will almost certainly be paying dividends much higher than today; yet in the meantime you’ll be getting a handy premium over the yield on government bonds. It’s almost as beautiful as the Sun’s corona.
Disclosure: The author, James Carlisle, own shares in Seek.