QE Will Cause Flight to Dividend Payers

One of the trends that should emerge in 201s is the rise of the high dividend stock.   With the global banking system teetering on the verge of needing another massive injection of liquidity to stay afloat this may finally cause a flight from sovereign bonds for good.  The market has already fled from everyone’s bonds that are not the U.S.’s.

The U.S. Bond market is the only one big enough to absorb the capital flows out of European stocks and bonds.  This is what we saw in 2011. A flight from fear to the relative safety of the U.S. Treasury market.  But, what happens when the U.S. bond market hits the wall?  What other market can absorb those capital flows?  Gold?  Don’t make even me laugh.  Commodities in general?  Sure, to an extent.

No, the U.S. stock market is going to be the beneficiary of these net capital flows.  But, and here’s the important point readers need to focus on, it will not happen across the board.  It will happen in very specific, high-yield, low risk companies.  If $90-$110 oil is a reality, and with U.S. foreign policy being what it is and the U.S. now a net exporter of oil that is a safe assumption, then high-yield oil services and pipeline stocks are going to be dynamite.

Dow components with greater than 3% yield will see net inflows.  We’re seeing that in companies like Merck (NYSE:MRK) and Microsoft (NASDAQ:MSFT).  They are leading the Dow higher while most of the other 30 languish.  Bond investors will still be bond investors, looking for a stable income stream.  As the default risk premium for U.S. debt continues to rise capital will leak away from that market lifting those companies that can provide them a stable income with little downside risk.

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Tom Luongo

About Tom Luongo

Tom Luongo is a professional chemist and self-taught economist who has been following and trading stocks for nearly 12 years. He has no formal ties to the financial industry and considers that an asset in his analysis of the interplay between monetary policy and capital markets.

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