I understand that stocks historically have been far more volatile than bonds, so it makes sense that the financial press will focus on the losses with headlines like Dow Falls Sharply As Rate Worries Linger during the downturns. However, we are puzzled by upbeat language such as Yields Climb on Economic Hopes utilized by the media of late in discussing the carnage in fixed income.
Hopefully, folks understand that the reason bond yields have risen is that bond prices have plummeted (long-term Treasuries are off more than 20% this year, much worse than the Dow or S&P 500), lest they be fooled by a rewrite of an equity market headline, Stock Yields Jump the next time stocks head south.
Of course, unlike what is nearly always the case with bond coupons, the yields on equities can rise even if prices do not fall. Indeed, dividends set another record in the second quarter, with companies in the S&P 500 doling out a record $140.6 billion, up from $137.6 billion in the first quarter and $123.4 billion in the Q2 2021.
While I always favor stocks that offer significant capital appreciation potential first and foremost, it should come as no surprise that I also like generous income producers, especially when those companies have shown a penchant for raising my payout.
With data centers in 50 major metro markets, Digital Realty Trust (DLR) offers customers a robust global ecosystem that utilizes more than 1,000 telecom providers, ISPs, content providers and enterprises to provide carrier-neutral interconnection facilities. Jim Chanos of short-selling fame recently espoused a (not so surprisingly) bearish view on the data center space, citing intense competition from the leading cloud players like Amazon (AMZN), Alphabet (GOOG) and Microsoft (MSFT). But, a tightening supply chain has made it less feasible for hyperscalers to self-build, and DLR CEO Arthur Stein’s view is the attractiveness of deploying multi, hybrid-cloud architecture makes having a centralized data center paramount. Shares have been clobbered this year, bringing the multiple of per share funds from operations well below the historical norm. Even better, the dividend was hiked over 5% in March and DLR now yields a robust 4.0%.
BB&T and SunTrust combination Truist Financial (TFC) is another big yielder that recently raised its payout. As of the end of Q2, Trust was the sixth largest bank in the U.S. by deposits, with more than $545 billion in assets and clients spanning some 10 million households. In Q2, the bank grew respective pre-provision net revenue 25% and 26% versus Q1 2022 and Q2 2021, driven by higher yields and loans and lower noninterest expenses. CEO Bill Rodgers said, “This quarter’s performance, combined with improving client experience trends and dramatically lower merger costs, reflects the initial benefits of our shift from integrating to operating. While there’s still work to do, such as stemming elevated operational losses, closing out residual integration issues and completing our decommissioning process, I am very confident in Truist’s trajectory and reaffirm our commitment to delivering positive operating leverage for the full year of 2022.” I like the historically conservative lending culture and look forward to additional cost savings down the road. Shares trade for 10 times forward EPS projections, while the dividend yield for TFC is 4.1%.
Caught up in the housing downturn, shares of Whirlpool (WHR) have been battered this year (off more than 30%) to now trade for only 7 times NTM adjusted EPS estimates. The appliance maker announced last month that it was buying the Insinkerator garbage disposal brand from Emerson Electric (EMR) for $3 billion cash. The purchase should not impact the dividend, however, where the yield is 4.5%, as the payout ratio is nearly a quarter of profits. Near-term supply constraints and raw material cost issues are real obstacles but are nothing new for Whirlpool as the company has navigated similar bumps in the road before, while consistently generating solid free cash flow. Management shares our optimism as evidenced by the $2 billion addition to the stock buyback authorization (now totaling $2.9 billion) in February.
This post was also published on John Buckingham’s Forbes contributor site.
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