Salient to Investors:

Brad Kinkelaar at Pimco said:

  • The underperformance of many high-dividend stocks in the past 8 months shows a sentiment shift already is under way. If rates continue to rise through 2014, albeit gradually, telecom, utility and REITs should continue to underperform the market.
  • Look for stocks with attractive dividends, particularly that will benefit from global growth – half the companies in his funds are based outside the US.
  • Avoid the most expensive parts of the domestic market, including shares hardest hit by the increase in interest rates, like toll-road companies in China, Brazil and Italy and US retailers.
  • Money managers with dividend-paying strategies flocked into a scarce menu of attractive-yielding stocks in the US, causing their share prices to increase significantly, but the reverse is now happening.

34 percent of economists expect tapering in December. The median economist predicts the 10-yr T-yield will rise to 3.37 percent by the end of 2014.

Benjamin Brodsky at BlackRock said tapering is inevitable and very likely in 2014 so the key T-yield could rise to a fair value of 3.7 percent by the end of 2014, significantly surprise the market, and add volatility not only in Treasuries but to other asset classes. Brodsky said the Fed will be losing one of its essential tools to control the long end of the market amid signs the recovery is strengthening.

Rob Morgan at Fulcrum Securities said large-cap dividend-paying stocks will be hurt as yields on 10-yr Treasuries continue their rise since May, though swapping equities for fixed-income securities is not imminent.

Jim Stellakis at Technical Alpha said investors have become more aggressive about pulling money out of the dividend index, which is in a general downtrend relative to the S&P 500 total-return index, with lower peaks and troughs indicating people are becoming more impatient and selling sooner. Stellakis said the dividend index falling below the March 2012 trough will indicate further deterioration in investor sentiment.

Eric Teal at First Citizens BancShares said we are in a transition period as equity investors adjust to a rising-rate environment, and as the US economy moves into later stages of the expansion that began in June 2009, investors need to be more selective about the type of dividend-paying stocks they purchase, and differentiate between companies with high-dividend yields relative to the market and those whose payouts may be poised to increase. Teal seeks stocks with growing dividends that are leveraged to an economic recovery, especially on a global basis, like the industrials, which have expanded payouts in recent years. Teal said Treasuries approaching 4 percent will be a trigger for asset-allocation models.

James Bullard of the FRB St. Louis said any tapering should be modest to account for low inflation, and should inflation not return toward target, the Fed could pause tapering at subsequent meetings.

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