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.
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Frequently Asked Questions about this Article…
The convergence in yield is primarily due to the rising prices of traditional high-yielding companies like REITs, which has driven down their yields. Meanwhile, traditionally low-yielding sectors such as mining and energy have seen share price declines and increased payout ratios, contributing to this trend.
Traditional high-yielding companies such as REITs have seen their prices bid up, which has resulted in a decrease in their yields. This is part of the broader trend of yield convergence in the market.
In traditionally low-yielding sectors such as mining and energy, share prices have fallen, and companies have increased their payout ratios where possible, contributing to the overall yield convergence in the market.
Yield dispersion is at its lowest point in 15 years due to the convergence of yields across different sectors. High-yielding sectors have seen yields decrease, while low-yielding sectors have increased their payout ratios, narrowing the gap.
Banks are currently yielding a 60 basis point premium to the market average, which is the lowest spread observed in the past 10 years.
The combination of yield convergence and potential US rate hikes suggests there may be a market rotation away from defensive 'bond proxies' that have performed well recently, towards other opportunities.
In the current market environment, high-quality cyclicals are preferred, especially those that may be rewarded for an increased dividend yield.
Utilities and insurance companies, perceived as safe yielders, are focusing on maximizing their dividend payments as part of their strategy in the current yield convergence environment.
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