Buying bonds for safety is a losing strategy: Ave Maria manager
Good companies are selling at bargain basement prices
(IN) Buying bonds for safety, when so many stocks are yielding such attractive dividends, is a losing strategy, according to George Schwartz, president of Schwartz Investment Counsel Inc., a $1 billion asset management firm.
“You’ve got a lot of good companies selling at throwaway prices and people are still afraid to buy stocks,” he said.
Mr. Schwartz, co-manager of the $210 million Ave Maria Rising Dividend Fund (AVEDX), pointed out that the 10-year Treasury note is yielding 1.9%, while the average dividend yield of the S&P 500 is 2.5%.
“It’s an anomaly that bond yields are so low, but people still want to buy bonds,” he said. “Meanwhile, with stocks you’re not just getting a dividend, you’re getting an increasing income stream, plus some capital appreciation.”
That is the gist of the Ave Maria Rising Dividend Fund, which Mr. Schwartz manages along with Rick Platte.
Although the fund has the word dividend in its name, Mr. Schwartz explained that it is actually a value-oriented capital appreciation strategy.
It is true that each of the 41 stocks in the fund pays a dividend, and many have been increasing those dividends for as long as 25 years.
However, he pointed out, “the average dividend yield of the stocks we own is 2.6%, and most of the fund’s total return will come from capital appreciation.”
The fund, which has a five-star rating from Morningstar Inc., has gained 3.4% so far this year, ranking it in the seventh percentile of the large-cap-blend category.
The category average return year-to-date is 5.9%, while the S&P 500 is up 2.7% over the same period.
“We’re looking for undervalued stocks, and we focus on rising dividends because that reflects good management, rising sales and rising earnings,” Mr. Schwartz said. “But this is not a high-yielding dividend fund, because many of the stocks we own have low dividends that are increasing.”
Medical technology company Stryker Corp. (SYK) is one example of a stock that is yielding a lower dividend but is still attractive enough to fit into the Ave Maria strategy.
Stryker shares, trading at around $48, come with a 1.9% dividend yield and a price-earnings ratio of 15.3.
The p/e is above the portfolio average of 12, but Mr. Schwartz still sees plenty of upside for Stryker, calling it a “$100 stock in three or four years.”
Cereal-maker Kellogg Co. (K), trading around $49, is an example of a higher-yielding stock in the fund.
Kellogg’s p/e is also above average at 15.4, but the stock has a dividend yield of 3.5%.
“Stocks are generally cheap right now and corporate profits will continue to increase,” Mr. Schwartz said. “That’s why stocks with a long history of increasing dividends are a good value today.”
Categories: Investment Wisdom, North America, Retirement & Savings, Statistics